energy sector in india - building more success for more results

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ASIAN DEVELOPMENT BANKOperations Evaluation Department

SECTOR ASSISTANCE PROGRAM EVALUATION

FOR

INDIA ENERGY SECTOR

In this electronic file, the report is followed by Management’s response and the Board ofDirectors’ Development Effectiveness Committee (DEC) Chair’s summary of a discussion of thereport by DEC.



Evaluation Study

Reference Number: SAP: IND 2007-17Sector Assistance Program EvaluationAugust 2007

Energy Sector in India – Building on Success for

More Results

Operations Evaluation Department



CURRENCY EQUIVALENTS

Currency Unit – Indian rupee/s (Re/Rs)Re 1.00 = $0.022

$1.00 = Rs45.4387

ABBREVIATIONS

ADB — Asian Development BankAERC — Assam Electricity Regulatory CommissionASEB — Assam State Electricity BoardBEE — Bureau of Energy EfficiencyCBM — coal bed methaneCDM — clean development mechanismCERC — Central Electricity Regulatory CommissionCIDA — Canadian International Development Agency

CPS — country partnership strategyDFID — Department for International DevelopmentEA — executing agencyEIRR — economic internal rate of returnESCO — electricity supply companyFIRR — financial internal rate of returnGDP — gross domestic productGEB — Gujarat Electricity BoardGERC — Gujarat Electricity Regulatory CommissionICRA — Investment Information and Credit Rating AgencyINRM — India Resident MissionIPP — independent power producer

IREDA — Indian Renewable Energy Development AgencyJBIC — Japan Bank for International CooperationLNG — liquefied natural gasMFF — multitranche financing facilityMMSCMD — million metric standard cubic meter per dayMPERC — Madhya Pradesh Electricity Regulatory CommissionMPSEB — Madhya Pradesh State Electricity BoardMW — megawattNHPC — National Hydroelectric Power CorporationNTPC — National Thermal Power CorporationOED — Operations Evaluation DepartmentOEM — operations evaluation mission

PCG — partial credit guaranteePCR — project completion reportPFC — Power Finance Corporation LimitedPPAR — project-program performance audit reportPSOD — Private Sector Operations DepartmentPTC — Power Trading CorporationR&M — renovation and modernizationRE — renewable energyRSDD — Regional and Sustainable Development Department



3

SAPE — sector assistance program evaluationSARD — South Asia Regional DepartmentSMEC — Snowy Mountains Engineering CorporationTA — technical assistanceTOU — time-of-useUSAID — United States Agency for International Development

NOTE

In this report, “$” refers to US dollars. FY refers to financial year from 1 April to 31 March.

Director General B. Murray, Operations Evaluation DepartmentDirector R. B. Adhikari, Operations Evaluation Division 2

Team Leader R. Schenck, Evaluation SpecialistOperations Evaluation Division 2, OED

Team Members B. Palacios, Senior Evaluation OfficerOperations Evaluation Division 2, OEDI. Garganta, Operations Evaluation Assistant

Operations Evaluation Division 2, OED

Operations Evaluation Department, SE - 008

Keywords

asian development bank, distribution, energy, energy efficiency, generation, power sector,india, performance evaluation, sector strategy, sector governance, transmission,

regulation, development impact.



CONTENTS

PAGE

EXECUTIVE SUMMARY iii I.

INTRODUCTION 1

A. Background 1 B. Objectives and Scope 1 C. Evaluation Methodology 1

II. THE POWER SECTOR AND ADB’S ASSISTANCE PROGRAM 2 A. Macroeconomic Context 2 B. The Indian Power Sector 2 C. External Assistance to the Power Sector 14

III. PROJECT IMPLEMENTATION AND OPERATION 15 A. Generation Sector 15 B. Transmission Sector 16 C. Energy Efficiency and Renewable Energy 18 D. Power Sector Development Programs 19

IV. EVALUATION OF ADB ASSISTANCE 27 A. Bottom Up Assessment of ADB Assistance 27 B. Top Down Evaluation 32 C. Assessment of ADB Performance 36 D. Overall Evaluation 37

V. CONCLUSIONS, KEY LESSONS, ISSUES AND RECOMMENDATIONS 37 A. Conclusions 37 B. Main Lessons Identified 37 C. Assessment of the Main Issues Facing the Power Sector 38

VI. STRATEGIC IMPLICATIONS FOR THE INDIA POWER SECTOR 41 VII. RECOMMENDATIONS: FUTURE ASSISTANCE PRIORITIES 48

The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflictof interest in its independent evaluations were observed in the preparation of this report. David Parishand Jindra Samson were the consultants. To the knowledge of the management of OED, there wereno conflicts of interests of the persons preparing, reviewing or approving this report.



APPENDIXES

1. Loans and Technical Assistance Grants to India's Energy Sector 492. Sector Assistance Program Evaluation Study Methodology 523. India's Energy Policy and Program Development Milestones 53

4. Customer Survey 595. Development Coordination Matrix for the Energy Sector in India 626. Operation Evaluation Mission Case Studies 637. Accounting Issues 798. Potential for Corruption in the Energy Sector 839. Project Performance Ratings 8910. Fuel Supply Issues 92

Attachments: Management Response

DEC Chair Summary



EXECUTIVE SUMMARY

Introduction

This sector assistance program evaluation (SAPE) report presents an independentevaluation of Asian Development Bank (ADB) assistance to the energy sector in India. It

identifies lessons and areas where the Government of India, ADB, the private sector, and otherstakeholders can work together more effectively to achieve the ultimate goals of providingelectricity at an affordable cost and developing an efficient and financially viable power sector. Itis also designed to provide an input to the India country assistance program evaluation and tothe formulation of a new country partnership strategy and business plan.

Country Context

India is one of the fastest growing developing economies, having expanded by about 6%per annum in the 1990s and by some 8% in recent years. The share of agriculture has declinedsubstantially in the past decade while that of manufacturing increased with an average growthrate of 6.3% per annum in the sector during the same period. India’s fast-paced economic

growth and its rapid rate of industrialization and urbanization have fueled energy demand sothat in 2003 it ranked sixth worldwide in primary energy consumption. The overall energyintensity of the economy has declined over the years. This has been made possible by thegradual substitution of primary noncommercial energy sources by the more efficient commercialenergy sources.

Sector Issues

The growth of the electricity sector has been largely supported by the central and stategovernments’ capital resources (up to 25% of annual budgets). The centralized electricity supplypolicy and a regional and national transmission grid policy have resulted in large electricityplants and five regional grids. India is largely self-reliant on Government-owned fuel supplies,

making use of the available hydropower and coal resources. Some years ago, India began amajor energy policy reform effort to make electricity more affordable to the less affluent sectorsof the population, particularly farmers, through very large cross-subsidy schemes. Theseschemes, however, have not been financially sustainable. State electricity boards were unableto increase supplies, and they defaulted on payments as revenues failed to meet operatingcosts. Subsequently, the central government initiated a series of reforms culminating in the2003 Electricity Act which sought to restructure the entire electricity industry.

The impacts of the electricity reforms to date have increased competitiveness and led toa demonstration effect among the states’ electricity sectors and their regulators, addingmomentum to the central government’s impetus for reform. The positive outcomes have isolatednational anti-reform movements. The effects of reforms are incremental, rather than “big bang,”

and follow an Indian development model rather than one imposed by outside assistanceagencies. The reforms are gradually shifting the financial risks from the consumer to themanagement of the electricity sector. The least effective changes have been in the areas ofhuman resource development and in attaining the desired quality of governance in thedistribution sector (particularly with regard to management and accounting practices).

Reform initiatives, however, have been insufficient to keep pace with the country’seconomic growth and energy needs. India’s current power sector has insufficient generationcapacity, lacks optimal utilization of generation resources, transmission between regions is



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limited, distribution facilities are aging and increasingly unreliable, losses in transmission anddistribution and the effects of theft cause large financial losses for the system, the pace of ruralelectrification is slow, and there is widespread inefficient use of electricity. India’s need forpower is growing rapidly, with consumption having increased by about 64% over the last 10years. Nevertheless, electricity is still inaccessible to the majority of households. While over80% of villages are already electrified, only 56% of total households have access to electricity

and in rural areas only 33% of households have access.

ADB Assistance

Since ADB’s power sector operations in India began in 1986 there have been 24 publicsector loans for 21 projects with a total value of $4.6 billion (29% of the total public sectorlending to India). This has been supported by an additional $337 million of loans through ADB’sprivate sector operations. There has been a consistent focus on transmission and distributionlending and more recently on power sector restructuring. ADB public sector lending has exitedfrom generation and hydrocarbons, consistent with the changes in ADB’s energy policydirections, while private sector operations are now taking a larger role in financing generation.These loans were supported by 50 technical assistance (TA) projects, valued at $23.5 million. A

further $1.9 billion in public sector loans are in ADB’s funding pipeline.

Project Implementation and Operation – Main Findings

ADB provided program assistance to three state electricity boards: Assam, Gujarat, andMadhya Pradesh. The overall conclusion from this study is that ADB program assistance, todate, has generally been successful as a result of targeting state electricity sectors that werethoroughly committed to change. This includes the state governments of Assam, Gujarat, andMadhya Pradesh, their respective state electricity boards, the nonexecutive employees of thestate electricity boards, and the independent state-appointed regulators. In all three stateelectricity boards evaluated, unbundling has been achieved and new separate corporate entitieswith “clean” balance sheets have been established as a result of restructuring. The restructuring

included partial state assumption of liabilities, more transparent subsidies, renegotiation ofpower purchase agreements, rationalization of state-owned generation to promote merit orderdispatch, and changed organizational structures and cultures that were re-focused on servicedelivery. Each of the state electricity boards has maintained a shell organization to serviceliabilities that were not directly related to the assets of the unbundled corporations and serve asa single buyer for the distribution companies. The unbundled generation and transmissionorganizations are assessed as having a good probability for sustaining independent operationsand becoming self-funding. All states indicated that ADB assistance was catalytic in providingthe impetus to implementing the reform process.

The transformation process for unbundling the distribution companies is well developedbut has not been completed. The distribution companies do not, as yet, have complete

independence from the parent shell company and still rely on the shell company for some oftheir strategic functions. The study findings suggest that more assistance may be required tomaintain the momentum created by the program loans to develop the distribution companiesinto independent organizations with best-practice governance and risk management policiesand procedures that would enable them to become self-sustaining. ADB should considerproviding some additional assistance in human resource development and developinginformation technology systems that support planning and governance. In Assam, there is aconcern that the split into three distribution companies may not have been optimal; concernsthat the required future staff expertise and numbers, together with unbalanced customer mixes,



v

may lead to at least one distribution company’s being unsustainable. The study found conflictinginformation regarding this issue that both supports and contradicts the concerns, To date, thereform outcomes are rated as “successful.” However, sustainability depends on ongoingcommitment and funding.

ADB project loans to state electricity boards have resulted in both increased capacity to

serve additional load and, more importantly, greater reliability of service delivery. A significantportion of the loans were used to upgrade systems that had suffered from a lack of expansionand inadequate operations and maintenance. Maintenance has shifted from being primarilyreactive to preventive, and this has resulted in better quality of supply. Metering has been widelyimplemented at all levels in the service delivery chain, and this is enabling widespread detectionand reduction of nontechnical losses. ADB requirements for bidding and awarding contractswere implemented by the state electricity boards. This caused some delays due to ADBprocesses and one state electricity board’s lack of experience, but loan savings were alsorealized. For instance, resultant savings by Madhya Pradesh amounting to $54 million werereallocated to other projects with the assistance of the India Resident Mission. Overall, the stateelectricity boards’ procurement expertise was enhanced by the experience and the executingagencies expressed satisfaction with the consulting services. The exception noted by all three

state electricity boards has been for human resource consulting, which they rated as partiallysatisfactory. The projects in Gujarat and Madhya Pradesh are rated “successful.” As the Assamproject is approximately 12 months behind schedule, it is not appropriate to evaluate theoutcome at this time. However, preliminary indications point to a successful outcome.

ADB has provided technical assistance to the regulators in Assam and in Gujarat. Theoutcome from this support was successful and is sustainable. The state regulators havedeveloped a high degree of independence and are proactively regulating the state electricityboards’ generation, transmission, and distribution sectors, with increased performance-basedregulation replacing normative, cost-based regulation. The regulators have, for instance,targeted improvements in supply and service levels while mandating reductions in nontechnicallosses. Furthermore, the regulators are actively promoting consumer participation in the reform

and regulatory processes. The regulators are gradually becoming financially independent bygenerating their own revenues, and they are actively participating as a group at the nationallevel to develop their expertise. The study considers that the state regulators have performed amajor role in the successful reform and unbundling of the state electricity boards, but they alsorequire some further assistance. A key requirement for future development may be to facilitatefurther national and international exchange of knowledge and software for regulatory personnel.In particular, regulatory personnel do not have the human or software resources to evaluatesystem least-cost planning and thus lack a critical resource to contain industry costs. The studyalso found the technical assistance provided to the regulators to have been successful.

Loans to Power Grid were timed to extend and upgrade the grid, connect new supply tothe grid, facilitate interregional transfer of power to optimize costs and grid operations, and to

gain efficiencies in service delivery at a time of national shortages. The resultant increasedsystem capability was still insufficient to meet overall demand, and interregional transmissionsuffers from bottlenecks. Without the added capacity, however, shortages would have beengreater, and hence the loan was highly relevant to the sector. The company expertise inoperations and management is highly rated. Continued financial support will be required forPower Grid to develop its interregional transmission capacity from 9,500 megawatts (MW) toover 30,000 MW by 2012.



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ADB’s assistance has focused largely on the weakest links in the provision of electricity,which are the state electricity boards. They suffered the most from policies that were designedto improve the livelihoods of the poor and to strengthen the agricultural sector to make Indiaself-sufficient in food. This is still the weakest part of the sector, and ADB signaled its continuingrelevance when it approved loans to Uttaranchal in 2006 and a loan to further strengthenMadhya Pradesh in 2007. The study concludes that the policy shift adopted by ADB in 1996 has

resulted in a direct positive and sustainable impact:(i) Financial restructuring together with tariff restructuring, as well as lower costs,

have reduced the need for subsidies. This means fewer funds are required forthe power sector, leaving more available for social sectors.

(ii) The increased quality of supply has improved the reliability of supply. This is amajor attraction to industries that are heavily reliant on secure fuel supplies (suchas the information technology industry) and will impact more highly on thedeveloped states.

(iii) The demonstration effects of renewable energy projects have made some of thissector self-sustaining.

(iv) The concurrent development of regulators' expertise and independence,transparency, and consumer advocacy is removing political interference and

providing a balance between the needs of consumers and industry. This has ledto consumer involvement and a shift across many of the states to a service focusfrom a supply focus.

The major issues facing the Indian power sector are fourfold:(i) New investments in the energy sector will depend on the commercial viability of

the distribution sector to guarantee the power purchase agreements or prudentialrequirements. This will necessitate a widespread increase in the quality ofgovernance and maintaining the pace of reform.

(ii) Funding for the power sector, and particularly the distribution sector, will dependupon reforms and to make this sector self-funding. The generation andtransmission sectors are likely to become self-funding, but, because the

capability of India’s financial sector to provide the necessary funds is still limited,external assistance will still be required.

(iii) The availability of secure, reliable, and well-managed sources of fuel supplies tothe generation sector and other energy intensive industries is threatened byshortages and will need to be developed in tandem with the industry expansion.

(iv) Managing the environmental impacts of the electricity sector is increasing inimportance, as the system is expanding and the primary fuel source is coal.

The demonstration effects of the restructuring process in the states where ADB and theWorld Bank have provided assistance is likely to lead to an increased viability in the distributionsector and thus to greater capability to fund new generation requirements. Additionally, thetransmission needs can be met through adequate expansion funded by international assistance,

commercial lending, and revenues from the restructured states. Revenues that were previouslyused to fund inefficient distribution utilities can gradually be used for other purposes as the levelof technical and nontechnical losses are reduced and as energy efficiency measures are morewidely implemented.



vii

Overall Performance Assessment

The overall assessment rating on the performance of ADB assistance to the energysector in India is “successful,” which reflects satisfactory performance. This was based on botha top-down assessment of strategic positioning, contribution to development results, and ADBperformance and bottom-up assessments of lending and nonlending projects.

Over time, ADB has responded to the changing needs of the sector. The sectorassistance program was aligned with the development goals outlined in the Government’sdevelopment plans. It was consistent with ADB’s energy policy and country strategies. While theoverall power sector has made significant improvements in supply and sector governance,ADB’s assistance at the state level, where it has participated, has been highly effective. Thecombined efforts of ADB and the World Bank and their common focus on sector restructuringhave influenced the Government to undertake the major reforms implemented under the 2003Electricity Act.

ADB has contributed significant additionality that supported the successful outcomes ofprojects. This included (i) attracting private sector participation in recent years; (ii) developing

environmental evaluation capacity; (iii) efficient processing of variations due to savings assistedwith bid approval and awards; and (iv) providing advice on technical issues. Furthermore, ADBprovided timely and effective TA support which supported institutional strengthening appropriateto the design, the operations, and the development of the projects.

The bottom-up assessment looked at 19 completed public sector loans, of which 17were rated “successful” and 2 “partly successful” based on the five core criteria of relevance,effectiveness, efficiency, sustainability, and impact. All the 4 private sector operations projectsindependently evaluated were rated “successful.” The assessment examined 18 TA projects, 16of which were rated “successful” while the remaining 2 were “partly successful”.

Conclusions

With the passage of the 2003 Electricity Act, the emphasis in India is on increasedcompetition, open access to transmission and distribution networks, merit order purchase,power trading, and time-bound restructuring of state electricity boards. This established anenabling environment for reforms in the sector. ADB loans and TA have been within theguidelines of ADB policy, have targeted the sectors outlined in the country strategies andprograms for India, and have supported the reforms proposed in the 2003 Act. ADB assistanceto the state electricity boards was generally relevant, efficient, and effective. This was a directresult of ADB’s good understanding of the capabilities and desire of the sector to undergo thechanges that were agreed during the loan processing.

Tranche releases of policy loans and related covenants have been well supported by the

state electricity boards and have contributed to the major outcomes being achieved. The depthand length of ADB policy dialogue and client interaction is evident from the length of time in loanpreparation and from client responses. This was instrumental in matching client capabilities andinputs with ADB assistance.

Overall, the outcomes of the project and program loans and supporting TA have beensuccessful, and, with continued support to the state electricity boards, the intended long-termdevelopment impacts are likely to be achieved.



viii

Main Lessons Identified

The main lessons identified from the evaluation are (i) ADB’s approach to lending atstate level has worked well and should be used as a model for future assistance, (ii) sustainedtechnical assistance is needed to support the reform programs at state level, and (iii)corporatization is providing benefits similar to those normally attributed to privatization.

Implications for Future Assistance Program

India has to manage three conflicting goals in its energy sector: (i) meeting security offuel and energy supplies, (ii) increasing the efficiency of supply and financial operations, and (iii)minimizing the environmental effects of the increased supply needs. India’s continuing shortageof energy supplies (both for fuels and generation capacity) threaten its economic and socialdevelopment goals. The energy sectors’ viability needs to be improved through bettergovernance and operational efficiency. There is also a need to minimize the environmentalimpacts of increased generation growth that is needed to meet the growing energy demand.These conflicts are illustrated in Figure 1 below.

The energy sector: tradeThe energy sector: trade--offs betweenoffs between

three important but potentially conflicting goalsthree important but potentially conflicting goals

Electricity

Sector

EnvironmentEnvironment

SecuritySecurity EfficiencyEfficiency

Market stability

and robustness Competition

Geopolitical

instabilityMonopoly

regulation

NatureConservation

ClimateChange

Airpollution

The weakest links in attaining these goals are at the state level, where there are majordeficiencies in operational and technical efficiencies and continuing financial losses. As this

sector provides the primary revenues for system expansion, restructuring the state electricitysector to be self-sustaining should be the highest priority for assistance. In parallel, generalelectricity system expansion and in transmission and in generation should be addressed tobalance supply and demand, as their viability will be assured with reliable revenues from therestructured state sector. Concurrently, environmental concerns must be integrated through (i)state system upgrades that reduce losses from the overloaded systems, (ii) rehabilitation ofexisting older generation plant, (iii) greater emphasis on energy efficiency and (iv) a strategicenvironmental focus on the development of the system. Supporting these efforts, there should

Figure 1: Conflicts in the Energy Sector

Source: Adapted from 2005 NorskHydro Presentation.



ix

be a continued emphasis to improve the operational efficiency of the state electricity sectorthrough improved governance and the development of independent regulation.

Key Recommendations

Based on the evaluation findings, the following recommendations are put forward for

consideration in future ADB assistance to the energy sector in India. They are designed toprovide broad guidance but not to be overly prescriptive.

Recommendations DepartmentResponsible

Implementation

1. Subject to the Government’s agreement, continueand expand the current focus on state electricitysector restructuring and system expansion tobalance supply and demand.

SARD As part of the IndiaCPS and itsimplementation

2. Integrate into, and increase energy efficiency andrenewable energy initiatives in, lending programsat both central and state levels.

SARD, RSDD As part of the IndiaCPS and itsimplementation

3. Tailor products and services to meet clients’evolving needs.

SARD, RSDD,PSOD, INRM

As part of the IndiaCPS and itsimplementation

4. Increase the number and volume of nonsovereigntransactions to expand generation andtransmission.

SARD, PSOD,INRM


CPS = country partnership strategy, INRM = India Resident Mission, PSOD = Private Sector Operations Department,RSDD = Regional and Sustainable Development Department, SARD = South Asia Regional Department.

Bruce MurrayDirector GeneralOperations Evaluation Department



I. INTRODUCTION

A. Background

1. This sector assistance program evaluation (SAPE) report presents an independent

evaluation of the performance of Asian Development Bank (ADB) assistance to the energysector in India. It identifies lessons and areas where the Government of India, ADB, the privatesector, and other stakeholders can work together more effectively to achieve the ultimate goal ofproviding electricity at an affordable cost while developing an efficient and financially viablepower sector. It is also designed to provide an input to the India country assistance programevaluation and to formulating a new country partnership strategy and business plan.

B. Objectives and Scope

2. The objective of the SAPE was to provide a comprehensive and independentassessment of ADB’s assistance to the Indian energy sector, including its impact on the sector’sdevelopment, which is important to the country’s economic development and poverty reduction

programs. The evaluation, which focused particularly on the 1996–2006 period, took intoaccount (i) the power sector (generation, transmission, and distribution), (ii) the legislation andregulation of the power sector, and (iii) the sector’s fuel requirements. The SAPE was designedto address three sets of interrelated issues:

(i) How, and to what extent, did ADB contribute to the major development objectivesof the energy sector as stated in its country strategies and programs for India forthe evaluation period? How well were ADB’s programs aligned with the nationalpriorities and coordinated with the assistance provided by other developmentpartners? Were these programs delivered consistently?

(ii) Was ADB assistance (lending and nonlending) effective in achieving the desireddevelopment objectives of the sector? Were these objectives achieved efficientlyand are they sustainable?

(iii) What were the likely long-term development outcome and impact of ADBassistance? Did it improve the sector’s capacity to contribute to economic growth,poverty reduction, and the country’s overall sustainable development?

3. ADB’s public and private lending support has been extensive, covering the hydrocarbonsector, generation, transmission, distribution, power sector development, and renewable energy.The lending has been supported by technical assistance (TA) grants. The SAPE evaluated theperformance of loans, investments, and TA (Appendix 1).

C. Evaluation Methodology

4. The SAPE has carried out both top-down (strategic) and bottom-up (project level)

assessments following broadly the applicable ADB guidelines.

1

It also considered the influenceof ADB corporate level processes and their successive steps.2

5. The SAPE was carried out through a combination of field studies in India, interviews,and desk review of evaluation reports. The field studies were focused on a sample of lendingand nonlending projects

1ADB. 2005. Guidelines for the Preparation of Country Assistance Program Evaluation Reports . Manila.

2A more detailed outline of the study methodology is presented in Appendix 2.



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(i) ensuring coverage of a broad mixture of projects that covered generation,transmission, and distribution;

(ii) identifying projects that illustrated ADB’s involvement in India’s power sectorreform program; and

(iii) incorporating desk studies of previous OED energy sector evaluations in India.

II. THE POWER SECTOR AND ADB’S ASSISTANCE PROGRAM

A. Macroeconomic Context

6. India’s gross domestic product (GDP) grew at an average rate of 5.4% in the 1980s, 6%in the 1990s, and at about an 8% rate in recent years. The three major economic concerns forthe nation are inflation, very large trade deficits, and a need to build infrastructure to facilitateeconomic growth. The Tenth Five Year Plan (2002–2006) identified infrastructure investmentneeds of $156 billion, of which 40% is for power. But at the same time the Government faces afiscal deficit of 4–5% of GDP and hence must seek a range of funding sources for investment.As the power sector has losses about equal to 1.5% of GDP, however, the industry has toimprove performance in order to achieve commercial viability and justify this investment.

7. While agriculture’s share of GDP has declined substantially in the past decade, that ofmanufacturing has increased slowly but consistently (growing at an average 6.3% per annum)during the same period. As in other economies, and regardless of the stage of development,energy consumption and economic growth are positively correlated. India’s fast-paced overalleconomic growth and the rapid rate of industrialization and urbanization have fueled energydemand so that in 2003 it ranked sixth worldwide in primary energy consumption.3 The overallenergy intensity of the economy has declined over the past 10 years. This has been madepossible by the gradual substitution of primary noncommercial 4 energy sources (mainlycombustible renewable energy and waste) by the more efficient commercial energy sources.5

B. The Indian Power Sector

1. Overview

8. Firewood and cow dung provide an overwhelming 81% of the energy available to Indianhouseholds. India currently scores poorly on the Energy Development Index6 in comparison toother developing nations. This underdeveloped form of energy consumption poses a burden onwomen and children, who not only are burdened with the resource collection but also suffer fromdiseases related to its usage.

9. India’s energy mix includes a high share of noncommercial fuels, and electricityconsumption is a meager 9%. The high reliance on petroleum fuels in meeting the country’senergy requirements reflects a paucity of developed alternatives, including liquefied natural gas

(LNG) and coal-fired generation. Figure 1, below, indicates high energy vulnerability due todependence (measured by energy intensity of GDP at purchasing power parity and currency

3The top five consumers were Germany, Japan, People’s Republic of China, Russia, and United States.

4Primary noncommercial energy sources include fuel wood, dung, and crop residues.

5Sources of primary commercial energy include brown and black coal, crude oil, natural gas, hydropower, nuclearpower, and wind power.

6Developed by the International Energy Agency, it measures the transition to modern fuels usage and degree ofmaturity in energy use.



3

exchange rates) and vulnerability (measured through energy import costs as a percentage oftotal exports).

10. There has been a fundamental shift in India’s energy policy from energy’s traditional roleas a developmental input to that of a consumer-driven, tradable commodity. The effects of thischange in policy direction are now seen in the financial viability of the central and state powersectors, increased availability and quality of supply, and the recognition of consumer choice.

11. Growth of the electricity sector has been supported largely by central government andstate capital resources (up to 25% of annual budgets). The centralized electricity supply policyand a regional and national transmission grid policy have resulted in large electricity plants andfive regional grids. India also has relied heavily on Government-owned fuel supplies for thepower sector in order to utilize the available hydropower and coal resources. The country hasadopted a major policy effort to make electricity more affordable to the less affluent sections ofthe population, and in particular farmers, through very large cross-subsidy schemes.

12. These initiatives, however, have been insufficient to keep pace with the country’seconomic growth and energy needs. India’s power sector is characterized by (i) insufficientgeneration capacity, (ii) less than optimal utilization of generation resources, (iii) very limitedtransmission between regions, (iv) aging and increasingly unreliable distribution facilities, (v)losses in transmission and distribution and the effects of theft causing large financial losses tothe system, (vi) a slow pace of rural electrification, and (vii) widespread inefficient use ofelectricity. India is the seventh largest electricity generating country in the world and accountsfor about 3.5% of the world’s total annual electricity generation. Its need for power is growingrapidly, with consumption increasing by some 64% over the last 10 years. Forecast electricity

USA, 246

Japan, 112

Brazil, 11

India, 39

PRC, 52

Canada, 23UK, 30

France, 46Germany, 59

0%

5%

10%

15%

20%

25%

30%

0 0.2 0.4 0.6 0.8 1 1.2

Energy Intensity

Bubble size indicates 2003 oil import bill in $

High Risk: Vulnerable and

Dependant

Competitive: Low Dependence and

Vulnerability

E n e r g y I m

p o r t s a s % o

f E x p o r t s

Source: International Energy Agency. 2003.

Figure 1: India’s Energy Vulnerability



4

output growth is 10% annually to support a GDP growth rate of 7% to 8%. This is higher than inthe last decade, as the energy intensive manufacturing sector is expected to increase its shareof GDP. Electricity is still inaccessible, however, to the majority of households. While over 80%of villages are already electrified only 56% of total households have access to electricity, and inthe rural areas only 33% of households have access to electricity.7

2. Legislation and Regulation

13. Control and operation of the Indian power sector was until recently highly fragmented,without a clear road map, and driven by social and political goals with little regard to long-termeconomic impacts. Electric power is a concurrent policy matter between central and stategovernments.8 The Ministry of Power is the policy setting authority for the sector. It is assistedby the Central Electricity Authority, which advises central and state governments andundertakes planning and project appraisal. The central government is also a major investor inthe power sector and accounts for about 34% of generation capacity. 9 It operates theinterregional transmission grid and is responsible for developing and funding such otherinitiatives as national power regulation, electricity trading, funding renewable energy, energyefficiency, and rural electrification. Private generation accounts for about 13% of supply, and all

other generation (53%) as well as transmission and distribution is supplied at the state level.

14. National power regulation is the responsibility of the Central Electricity RegulatoryCommission (CERC), which was set up in 1998. It regulates tariffs for Government-ownedentities, regulates power activities that cross state borders, promotes a competitive industry,frames tariff guidelines, and advises the Government on tariff policy. The Appellate Tribunal forElectricity deals with appeals against decisions of the CERC and state electricity regulators.

15. The most important recent legislative milestones in the power sector include the 1998Central Electricity Regulatory Commission Act and the 2003 Electricity Act. The origins ofcurrent policy can be traced back to 1991, when independent power producers (IPPs) andprivate generation were permitted. Some investors entered the market but, with insolvent state

electricity boards as the prospective counterparties in transactions, investor enthusiasm waslimited. In 1996, Orissa became the first state to attempt a major sector restructuring withunbundling and privatization. The policy was, at best, a partial success. Also in 1996, the centralgovernment formulated a Common Minimum Program with states, including a minimumagricultural tariff benchmarked at half the cost of supply, encouraging private participation,planning 100% metering, and setting up regulatory commissions. In 2001, the EnergyConservation Act was passed to promote energy efficiency and demand-side management. In

7Ministry of Power. 2007.

8This is outlined in the Seventh Schedule of the Constitution of India.

9The central government owns a number of operating entities in the power sector. The principal ones are: NationalThermal Power Corporation Limited (NTPC), National Hydroelectric Power Corporation (NHPC), Nuclear PowerCorporation, Power Grid Corporation of India Limited, Rural Electrification Corporation, Power Finance Corporation

(PFC) and PTC. NTPC, set up in 1975, is the biggest thermal utility in India and the largest global client of theWorld Bank. It has 20 coal- and gas-fired plants with total capacity of 27,904 MW as of June 2007. It is statecontrolled but since 2004 the Government has sold 10.5% of the company through two public offers. NHPC, set upin 1975, is the country’s main hydroelectric power generator. It has nine plants and capacity of 2,475 MW. NuclearPower Corporation is the nuclear utility, operating 15 units with 4,410 MW capacity at six locations. Power Grid, setup in 1989, is the central transmission utility. Rural Electrification Corporation, set up in 1969, finances rural powerprojects. PFC, set up in 1986, provides finance for projects undertaken by state power utilities. It raises finance inthe market. PTC, formerly the Power Trading Corporation, was set up in 1999, by NTPC, NHPC, Power Grid andPFC, to trade power and to enter into long-term power purchase agreements. It was fully state owned until 2003but now has a majority of private shareholders, of which the largest is Tata Power. It is also buying power fromcaptive generators and from projects in Bhutan and Nepal.



5

2003, a major new Electricity Act was passed. This is a significant step in the national reformprocess. It aims to introduce competition to the power sector, provide power for all, and createan enabling framework for the accelerated and more efficient development of the power sector.The provisions of the Act include the introduction of a National Electricity Policy, extension ofrural electrification, open access in transmission, phased open access in distribution, mandatoryestablishment of state electricity regulatory commissions, license-free generation and

distribution, power trading, mandatory metering for all consumers, and stringent antitheftmeasures. The Government envisions providing power for all by 2012. This ambitious plan aimsto provide electricity sufficient to facilitate 8% annual economic growth, improve reliability andquality, ensure commercial viability for the industry, achieve cost-effectiveness in supply, andprovide all households with electricity.

16. While the broad thrust of policy is toward a more commercial power sector, the centralgovernment recognized the importance of social issues. In the past, many states had providedfree power to agricultural consumers and have subsidized domestic supplies through high tariffson industrial and commercial consumers. Centrally enabled policy now mandates metering andcharging for all consumption, including for agricultural activities, along with reducing cross-subsidies to no more than 20%. The new policy enables state governments to give explicit

subsidies to particular classes of consumers and provides for a minimum lifeline tariff for smallpower users, currently set at 30 kilowatt-hours per month. The Rhajev Gandhi program for ruralelectrification has a stated policy of connecting all households to a supply by 2012. The 2001census indicated that only 56% of households had electricity (33% in rural areas and 82% inurban areas). In the 10 poorest states, only 10–20% of households have electricity.10 While theobjective of universal access by 2012 may therefore prove difficult to achieve in practice, it isindicative of the Government’s commitment to bring power to every Indian household. Appendix3 contains a more comprehensive overview and legislative milestones, as well as comments onADB’s assistance.

a. Regulation of the Power Sector

17. There are two levels of regulation, at the central and state levels.(i) The CERC regulates tariffs for central government-owned generators and other

generators not owned by the Government and supplying the states andinterregional transmission. It also coordinates with other regulatory commissions,such as that for the environment, to develop complementary regulations for thepower sector.

(ii) State regulators oversee compliance with the 2003 Electricity Act as it affects theoperations of the power utilities in each state. The study observations note thatthe level of regulation varies from light-handed in Assam to heavy-handed inMadhya Pradesh. This difference may be attributable to the level of perceivedcompliance by the regulators to the 2003 Act by the different states and, to someextent, by the perceived authority and knowledge of the regulator.

18. The central and state regulators exchange information on a regular basis and formalmeetings provide venues for the interchange of ideas. This exchange also adds to thedemonstration effect of the changes made by regulators and the links between their regulationsand state responses to their regulations.

10International Publications and Information Services. 2006. Overview of Power Sector in India 2005 (revised

edition).



6

19. The level of the regulators’ independence is notable: operational revenues are beingcollected from the utilities, not the states, and considerable effort is being expended to publiclycommunicate responsibilities and independence. For instance, the CERC and the three stateregulators visited during the study ensured that official communications (involving state orcentral governments and their agencies) to and from their commissions were made publicthrough their official websites. The study also observed that consumer participation in the

regulatory process was being mentored by the regulators and that the regulators were takinginto account both supply- and demand-side concerns.

20. State and central regulators are increasingly taking a performance-based approach forsetting rates, although the major revenues portion is still established on a cost-plus basis. Atpresent, in the cost-plus structure, CERC generation regulations provide for recovery of full fixedcharges at 80% availability and incentive payment above 85% availability, subject to actualdispatch. Normative financing has been set at 70:30 debt to equity, and regulated assets areallowed a 14% return on their equity. State regulators are also using a normative approach tosetting costs, and they set agreed targets with the distribution sector for loss reductions,collection efficiencies, and merit order dispatch of state-owned generation assets.

b. State Electricity Boards

21. Until the 1980s the state electricity boards were financially viable and were providingsatisfactory service levels to their customers, but a rapid deterioration in performance occurredthereafter due to

(i) poor governance in combination with excessive state government interference;(ii) rapid increases in subsidies to consumers; and(iii) poor efficiency of capital due to high technical and nontechnical losses, as well

as growing attempts to increase self-reliance11 on power sources.

22. The aforementioned brought a self-fueling financial crisis: low collections led to a lack offunding for system maintenance and improvements, which further exacerbated technical

inefficiencies and losses and eventually led to payment defaults for fuel and electricity suppliedby the central government, and that subsequently exacerbated supply shortages. Furthermore,the loss of financial credibility prevented the state electricity boards from sourcing much neededadditional generation capacity, further increasing the gap between supply and demand. ThePlanning Commission reports that new private sector generation capacity between 1992 and1997 amounted to 1,430 MW against a target of 2,810 MW. During FY1998–FY2002, it was5,061 MW against a target of 17,588 MW. Most private IPPs have failed and most foreigninvestors have left India. Enron’s Dabhol project in Maharashtra State failed due to high tariffs,which put serious financial constraints on the state electricity board. As a result, paymentdefaults occurred, which have resulted in that plant being closed down. Both state and centralgovernments have failed to honor payment guarantees. Orissa was the first state to privatizedistribution, but the major investor, AES Corporation, has abandoned the project as it was

unable to obtain support and cooperation to reduce system losses and financial support fromthe Government to cover shortfalls in the interim phase.

23. The breakdown in energy consumption by consumer category for the year ended 31March 2004 is shown in Table 2. The combined domestic and agricultural consumptionaccounts for nearly 50% of the total, and the subsidies to these two consumer groups havebeen the primary cause of the state electricity boards’ revenue shortfalls.

11This fragments central planning and leads to less than optimal solutions.



7

Table 1: Electricity Consumption by Consumer Category

Consumer Category Consumption(gigawatt-hours)

Percentage

Domestic 89,736 25Commercial 28,201 8

Industrial 124,573 35Traction 9,210 3Agriculture 87,089 24Others 22,128 6

Total 360,937 100Sources: International Publications and Information Services. 2006. Overview of

Power Sector in India 2005 (revised edition).

24. A scheme of settlement was organized by the Government in 2001 This led to the write-off of some debt and the securitization of other amounts. Subsequently, state electricity boardshave kept current on new power purchases under a letter of credit scheme. This created a newclimate of financial discipline in the power sector.12

25. There are 29 state-level power sectors in India, of which 24 have constituted stateelectricity regulatory commissions13 and three states have unbundled and or corporatized theirelectricity boards. However, the progress varies across states. In the most advanced states,responsibility is now divided between a regulator, a generation company, a transmissioncompany, and one or more distribution companies, and there is substantial autonomy for thenewly created companies. In addition, some states have retained the state electricity board as aholding company or it has retained roles such as power trading. Each individual state isresponsible for its own restructuring; hence there is no single model for unbundling. In all, 18state electricity regulatory commissions have issued tariff orders, representing a significant shiftto independent tariff setting.

26. The effect of the 1998 and 2003 acts, along with independent14

actions of some stategovernments and state electricity boards, has resulted in a radically positive change in thesector. The results of the changes on the state electricity boards imposed by the 1998 and 2003acts are monitored by CRISIL Limited and Investment Information and Credit Rating Agency(ICRA) Limited (India) and are published annually as individual and relative ratings for eachstate electricity board. These reports include monitoring compliance with regulations and tariffsetting. The most recent (2006) review of the state electricity boards notes major improvementsin the state electricity boards, which result from the facts that

(i) the state electricity boards have now increased cash collections and there is anoverall decrease in subsidy levels,

(ii) supply costs have been contained, and

12Securitization of old outstanding dues: Tripartite Agreements under the Scheme for One Time Settlement of Dueshave been signed between the Government of India, Reserve Bank of India and 28 states. One-time settlement ofthe dues from state electricity boards and successor entities in Andhra Pradesh, Assam, Bihar, Chhattisgarh,Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka, Kerala, Madhya Pradesh, Maharashtra,Orissa, Punjab, Rajasthan, Sikkim, Tamil Nadu, Uttar Pradesh, Uttaranchal, and West Bengal.

13As of 31 March 2005.

14Some states took steps to reform their power sectors. Foremost among them was Orissa, which, with World Bankassistance, completely unbundled its state electricity board and established the country's first state electricityregulatory commission in 1996. Reforms in Orissa were followed by similar reforms in Andhra Pradesh, Haryana,Karnataka, and Uttar Pradesh with World Bank assistance.



8

(iii) business processes of the state electricity boards have been significantlycommercialized.

27. Overall technical and nontechnical losses remain high, metering of consumers isincomplete, collections can still be significantly improved, and tariff filings in many states are notfinalized. Aggregate technical and commercial losses are in the range of 50% of the power

generated.15 High technical losses are due to the sector’s low priority for funding; long lines toremote locations, which exacerbate losses; high transformer losses; and poor load control,which overloads the system. In most parts of India, distribution infrastructure has suffered frominadequate transformer capacity; lack of redundancy; and poor executive information decisionsystems, largely due to a lack of information technology. In summary, the distribution sector hassuffered from years of neglect, and both capital investments and operational improvements areurgently needed.

28. There is a shift in the distribution sector from an engineering supply orientation to acustomer service focus. Electricity call centers log and monitor complaint responses and arefurther supported by customer service centers, with extended hours and computerized billingbeing rolled out across several of the state electricity boards. Customer satisfaction (see survey

in Appendix 4) has increased with the better reliability and quality of supply and the lowering oftransaction costs when dealing with the state electricity boards (for instance, because of onlinecollections and billing centers).

c. Public Generation Sector

29. The installed interconnected generation capacity of the national grid as of 1 April 2007 isshown in Table 2. Frequent supply interruptions and poor power quality have driven manyindustries to develop captive generation plant having combined capacity of about 25,000 MW.

Table 2: Installed Interconnected Capacity of the System

Fuel Capacity (MW)Coal 70,686Gas 13,692Diesel 1,202Hydropower 34,654Renewable Energy 7,760Nuclear 4,120

Total 132,114Source: Ministry of Power. 2007.

30. The public generation sector has been the outstanding beneficiary of the industryrestructuring. First, the securitization of the state electricity boards’ outstanding debts and new

operating rules that rely on secure letters of credit have resulted in nearly 100% collections bythe major generation companies National Thermal Power Corporation (NTPC) and NationalHydroelectric Power Corporation as well as by Power Grid Corporation of India Limited. North-Eastern Electric Power Corporation’s collections are over 95%. Furthermore, the centralgovernment has corporatized most of its non-nuclear generation plant. NTPC is now publiclylisted, giving it a more commercial structure. This enables the company to obtain funding for

15Includes approximately 7–8% in station use, and hence transmission and distribution losses are above 40%.



9

new infrastructure through commercial institutions without the need for government guarantees,and it thereby introduces private sector investment and diversification.

31. Additionally, the CERC has introduced availability-based tariffs and performance-basedtariffs, which have resulted in increased system availability and large incentives to reduceoperating costs. Availability-based tariffs for electricity are promoting efficiencies, and plant load

factors 16 on generating plants rose from 72.7% to 74.3% in FY2004-2005 17 despite someproblems over fuel supplies. Hence, the structural changes outlined in the 1998 and 2003 actsand the central government’s actions have brought this sector forward to where direct centralgovernment support and intervention may no longer be necessary.

32. Despite these measures, however, supply still does not match demand. The Tenth Planprogram targeted capacity addition of 41 gigawatts. Coal and hydropower were seen as themajor sources for capacity addition and together constituted more than 85% of the total capacityaddition program. In the end, due primarily to a lack of hydropower and coal-fired capacity, thisaddition is likely to be only 32 gigawatts (22% under plan). Also, the gas sector capacitycommissioned during this period is likely to be under plan due to fuel supply constraints.Although the focus of capacity addition was shifted to gas and nuclear at the time of the midterm

appraisal, this failed to materialize. The anticipated capacity addition during the Tenth Plan is32,094 MW, taking the country’s total installed capacity to 137,100 MW by the end of 2007. Thetable below provides a breakdown of capacity addition by fuel segment.

Table 3: Capacity Additions: Generation Sector

Target For Tenth Plan and Anticipated Capacity Additions

Hydro Thermal Nuclear Total

Coal Gas Diesel

Original Target 14,393.2 20,533.0 4,749.3 113.9 1,300.0 41,109.8

Midterm Appraisal 11,125.0 16,775.0 6,395.3 89.8 2,570.0 36,955.1

Now Anticipated 9,464.0 16,475.0 4,665.3 89.8 1,400.0 32,094.2

Slippage (4,929.2) (3,578.0) 23.6 (632.1) 100.0 (9,015.6)Source: Central Electricity Authority.

d. Generation: Independent Power Producers (IPPs)

33. In 2007, there were over 30 private generation stations in India with a total capacity of17,113 MW18 and an estimated 25,000 MW of self-generation plant. Of the latter, approximately14,000 MW is connected to the grid. With open access declared under the 2003 Electricity Act,more plant could be connected where economic conditions enable these to be competitive withinterconnected plant and it is now possible to directly supply customers. However, there arecounterincentives for supplying large customers directly, as the wheeling charges for the powerinclude collecting the existing cross-subsidies payable by industrial and commercial consumers.

34. The Government’s PTC (formerly Power Trading Corporation) has created substantialimpetus for reintroducing independently produced power. The PTC now acts as an intermediarybetween the state electricity boards and IPPs, holding long-term power purchase agreements

16Plant load factors are calculated as a percentage of actual deliveries divided by the maximum theoretical availableoutput.

17In 1985, plant load factors were only 55%.

18Ministry of Power, April 2007.



10

with both purchasers and sellers. Moreover, the requirements of the new acts for opencompetitive bidding for all new generation capacity and PTC’s ability to securitize the off-takehas led to renewed interest in IPPs. Power trading is growing rapidly and allowing bettermatching of demand shortfalls with supply surpluses. During FY2004-2005, 3,949 MW of newIPP capacity was added, and there has been financial closure on some 4,000 MW of new IPPcapacity since January 2006.

e. Generation: Renewable Energy

35. Renewable energy has established itself as a viable source of power and constitutes 5%of the total installed load (7,760 MW in 2007). It has attracted private investment. From 3,000MW of installed wind power, for instance, 2,912 MW was privately funded. Small hydropowerprojects and wind power are being funded through commercial lenders, but other projects usingbiomass, solar, and energy from waste products have not developed sufficiently to assurecommercial investments. There is considerable scope for further developments, and the Ministryof Non-conventional Energy Sources has identified potential sites for renewable energydevelopment. There is strong regulatory support, including attractive financial and fiscalincentives, to promote additional capacity. Due to the high-risk nature of plant other than wind or

small hydropower, however, public sector finance or guarantees will be needed to develop thissector further.

f. Interregional Transmission

36. There is a large mismatch between load centers and power supply capacity.Interregional transfer capacity had been raised from 4,950 MW in 2002 to 9,500 MW by March2005. This expansion is still insufficient to transfer the excess thermal capacity to load-deficientareas (from the eastern to southern and western regions). Transfer of energy increased by 40%during FY2004-2005 compared to the previous year, and the high-voltage transmission systemcurrently delivers 40% of the interconnected energy needs. Planning to 2012 indicates the needto expand the transfer capacity to 30,000 MW, which will mean transferring about 60% of all

power consumption in India. This will be critical to the Government’s development plans.

Table 4: Regional Anticipated Power Supply Positions during 2006–07

Peak EnergySurplus(+) Deficit(-) Surplus(+) Deficit(-)Region

MW % Million Units %Northern -5,999 -16.9 -25,141 -11.4Western -3,695 -10.5 -20,882 -9.3Southern -3,469 -11.2 -16,439 -8.5Eastern -405 -3.4 8,500 12.2Northeastern -123 6.6 -806 -8.5

All of India -13,727 -11.9 -54,916 -7.6Source: Central Electricity Authority.

37. System availability is excellent and productivity improvements are evident. Systemavailability is 99.74%,19 with an outage rate of 3.25% (as against 3.95% in the previous year).

19As of FY2004–2005 according to Power Grid.



11

Since 1992, average annual growth in the asset base has been 43%, staff increase has beenheld at 1.9% per year, and profitability per employee has increased by nearly 250%. 20

g. Rural Electrification

38. The pace of electrification has been declining because of the lack of returns from these

programs. The Government has launched the Rajiv Gandhi rural electrification program whichplans to provide electricity access to 100% of rural households by 2012. The program,administered through the Rural Electrification Corporation, envisages huge investment instrengthening the existing electricity network and adding new assets in the forms of substations,transformers, and lines. Also important is the ability of the utilities to provide power to thesecustomers at rates they can afford. These customers’ ability to pay will be significantly less thanthat of existing consumers, as 30% of these households are living below the poverty line.Charged with implementing the scheme, the state-owned utilities have been facing financial,technical, and human resources constraints on the huge project implementation. They lackfunds, qualified contractors, and manpower for the implementation. The Government issupporting the program with a 40% capital subsidy and the remainder is being supplied by thestates. The challenge will be to develop the appropriate networks, either as extensions of

existing distribution systems or as distributed, remote generation systems with the assistance ofthe Ministry of Nonconventional Energy Sources.

h. Fuel for the Power Sector

39. Finance has been a major impediment to growth in the power sector. Lack of availablefuel is now becoming another critical factor in the delay of generation development. The twomost commonly used fuels in India are coal and hydropower, together constituting more than80% of the installed capacity. A small amount of plant is reliant on natural gas, diesel, andnuclear-based fuels. Renewable power has grown rapidly in the recent past but its contributionto meeting overall energy needs is marginal (Figure 2).

20International Publications and Information Services. 2006. Overview of Power Sector in India 2005 (revised edition).

Figure 2: Installed Generation Capacity

Hydro

26%

Coal

54%

Diesel

1%

Res

5%

Gas 11%

Nuclear

3%

Source: International Publications and Information Services. 2006.Overview of Power Sector in India 2005 (revised edition).



12

(i) Hydropower

40. Hydropower declined in the power mix from about 46% in 1966 to its current level of26%. The lack of hydropower has increased the need for thermal-fired plant to take over aconsiderable portion of the peaking role, which is traditionally the place of hydropower. This has

contributed to suboptimal use of resources in the power sector. Growth in hydropower has beenhampered by the large capital costs, cost overruns, poor planning, disputes between states, andthe lack of complementary infrastructure and land.

(ii) Coal

41. Coal is currently the most important and abundant fossil fuel in India and accounts for66% of India's energy. However, mobilizing capital for generation plant and supply chaininvestment has been a critical constraint on coal’s playing a more dominant role. Theunderdeveloped coal market has also been a constraint prolonging project development andplacing the burden on generation asset developers to manage fuel supply chain risks. TheEconomic Survey of India has indicated that nonavailability of desired amounts of coal resulted

in generation loss of 1.512 million kilowatt-hours during FY2004–2005, and it has hampered thegrowth of thermal generation.

42. Legal and policy frameworks, monopolistic industry structures, and a restrictive markethave deterred serious investment into the coal sector. The Government controls almost all coalproduction. Private mines are allowed only if they are captive operations that feed a power plantor factory. While the country has considerable supplies, it faces two major hurdles: the existingavailable quality of coal is gradually declining and the lead time to bring new mines on line isabout 8 years. India will need to import additional supplies in the near term and resolve its fuelsecurity concerns in the midterm.

(iii) Gas

43. As a result of gas supply shortages, 38 gas-based power stations with a total capacity of9,536 MW had to operate at a load factor of only 58% during FY 2004-2005. The Government’soptimism with respect to the role of natural gas in the country’s power mix can be perceivedfrom the fact that gas-based capacity additions during the Tenth Plan were revised upward from4,749 MW to 6,395 MW in the midterm review. However, the anticipated additions during thePlan period are expected to be only 4,665 MW. This target will be missed primarily becausecommitted gas supply agreements could not be signed and the affordability of gas wasuncertain for several plants in the pipeline.21

(iv) Other Fuels

44. Nuclear power constitutes about 3% of existing supplies, and renewable energy 6% (seeabove). Nuclear fuel availability has been restricted until recently, and two of the existing plantshave reached or will reach the end of their useful operations within the next 2 years. Renewableenergy has not yet reached its potential due to the lack of commercial financing and therelatively new technology involved, which is perceived to be highly risky.

21NTPC has altered its capacity addition mix for the Eleventh Plan period by dropping implementation of the 4,550MW of gas-based capacity consisting of the Gandhar, Kawas, and Kayakulam power plants due to a lack ofconfirmed gas availability on a long-term basis.



13

i. Environment

45. India is one of the largest emitters of carbon dioxide behind the U.S., People’s Republicof China, and Japan, respectively, and it contributes about 4% of world CO 2 emissions.22 Amongthe top seven emitters, India had the highest CO2 emission growth rate of 4.2% between 1993and 2003. India is a signatory to the Kyoto Protocol but has not committed to a reduction in

greenhouse gas emissions. The poor quality of Indian coal and the requirement for disposing offlying ash generated in the thermal power plants constitute a major environmental concern.Although renewable energy sources are viewed to have lower environmental impacts, they arenot without impacts. For example, unsustainable use of biomass could lead to depletion offorests and wind energy may cause noise.

46. The 2003 Electricity Act recognizes the need for renewable energy in the energy mix,but it does not mandate curbs to address the environmental concerns arising from unbridledburning of fossil fuels. The 2003 Act only has a provision to promote cogeneration and electricitygeneration from renewable energy sources, and the Government is mandated to prepare a plan.At present, renewable sources that including wind, solar, and biomass constitute about 5% oftotal electricity generation in the country.

47. Cognizant of these issues, the Government set out the Integrated Energy Policy inAugust 2006 with a vision to reliably meet the demand for energy services of all sectors withsafe, clean, and convenient energy in a technically efficient, economically viable, andenvironmentally sustainable manner. The Policy provides specific measures that include (i)optimizing the power supply mix through greater use of indigenous hydropower resources andrenewable energy, (ii) pursuing technologies that maximize energy efficiency, and (iii) continuingrelated power sector reforms to control technical and commercial losses. To achieve this goal,the magnitude of investment needs is vast. India’s energy needs are primarily met by fossil fuels,which have negative economic and environmental impacts. Historically, the Indian power sectorhas been dominated by coal as the predominant fuel source while hydropower is the nextimportant source. By depending on fossil fuels, India may be exposed to price and supply

fluctuations that undermine its national energy security and, considering India's large andrapidly growing share in energy consumption, global and regional energy security, as well.Furthermore, the combustion of fossil fuels creates large amounts of greenhouse gas emissions,thereby damaging the atmosphere and contributing to climate change.

3. ADB Lending and Nonlending Assistance

a. Public Sector

48. The power sector has accounted for 29% of ADB loans to India, second only to thetransport sector. This equals 20.4% of ADB’s total public sector lending to the energy sector.The focus of recent lending has been on (i) power sector reform; (ii) promoting higher efficiency

and low-carbon power sources; (iii) expanding, de-bottlenecking, and optimizing transmissionand distribution systems; (iv) institutional strengthening to implement reforms required by the2003 Electricity Act; (v) promoting private sector participation; and (vi) encouraging energyconservation, thus ensuring environmental and social sustainability.

49. Consistent with the changes in ADB’s energy policy, ADB public sector lending hasexited from generation and upstream hydrocarbon activity and the Private Sector Operations

22International Energy Agency. 2003.



14

Department is now taking a larger role in financing generation. Since ADB’s power sectoroperations in India began in 1986, there have been 24 public sector loans for 22 projects with atotal value of $4.639 billion (Table 5). There has been a consistent focus on transmission anddistribution lending and a more recent focus on power sector restructuring. These loans weresupported by 50 technical assistance grants, totaling $23.5 million. A further $1.6 billion in publicsector loans were planned for 2007 and $1.75 billion for 2008.

Table 5: Distribution of ADB Assistance to India’s Energy Sector(As of 31 December 2006)

Loan Amount ($million) TA Amount ($’000)Subsector 1988–94 1995–99 2000–06 1988–94 1995–99 2000–06

Thermal 590 1,764 375Hydrocarbon 1,077 980 1,200Energy Sector 447 650 2,770 4,615 8,345RenewableEnergy

100 354 600

Transmission

and Distribution

250 425 1,100 1,200 1,300

Total 2,364 525 1,750 7,068 8,090 8,345

TA = technical assistance.Source: Asian Development Bank Database.

50. The overall success rate of power sector projects implemented in India is 83%, whichcompares favorably with the 82% success rate for all ADB energy projects (Table 6).

Table 6: Energy Project Success Ratings

Highly

Satisfactory-Satisfactory

Partly

Satisfactory

Unsatisfactory Total

India 20 (83%) 4 (17%) 0 24All ADB Projects 142 (82%) 29 (16%) 3 (2%) 174

Source: Asian Development Bank Database.

b. Private Sector Operations

51. ADB’s private sector operations took time to grow, owing to limitations in the country’sbusiness-enabling environment and also because of little synergy with ADB’s public sectoroperations. In 1996, ADB’s private sector operations supported a power company with a loan of$25 million and an equity investment of $15 million. After a long gap, in 2003, it approvedanother loan ($62.3 million) for a power transmission project. This was followed by an equity

investment of $9.7 million in an LNG terminal in 2004, an equity investment of $2.6 million in agas project in 2006, and a loan amounting to $75 million with a complementary financingscheme of $225 million for a thermal plant in that same year.

C. External Assistance to the Power Sector

52. The major development partner in the electricity sector has been the World Bank, whichhas supported power generation, transmission, and distribution projects, including assistance



15

directed to state electricity boards. It is supporting power sector reforms in the states of AndhraPradesh, Haryana, Orissa, Rajasthan, and Uttar Pradesh. ADB coordinates with the World Bankon the geographic demarcation of state-level operations, as well as to ensure overallcomplementarity of actions at both the central and state levels. Other funding sources for thesector include the Japan Bank for International Cooperation (JBIC), German developmentassistance through Kreditanstalt für Wiederaufbau, the United Kingdom’s Department for

International Development (DFID), Canadian International Development Agency (CIDA), andUnited States Agency for International Development (USAID). Although the combinedassistance of all multilateral agencies constitutes only about 8–10% of the total investments inthe sector, several key policy initiatives have been catalyzed as a result.

53. JBIC has been supporting the expansion of public sector generation, transmission, anddistribution, including rural electrification. DFID’s exclusive objective in providing assistance ispoverty reduction. It has financed studies for power sector restructuring in Andhra Pradesh,Haryana, and Orissa. USAID has extensively supported and continues to support policy aspectsof private sector participation. It has supported studies for state sector reforms through PFC byproviding grant assistance for energy management, conservation, and training. CIDA assistedKerala State in conducting extensive studies for restructuring its power sector. ADB is following

up on CIDA’s work through policy dialogue and preparation for a possible loan intervention.Together with the World Bank, CIDA is providing similar TA for power sector reforms in AndhraPradesh. In Madhya Pradesh, CIDA and ADB are cooperating and coordinating closely inproviding assistance for power sector reform. Some of the major projects financed by othermultilateral agencies are also listed in Appendix 5.

III. PROJECT IMPLEMENTATION AND OPERATION

54. The SAPE undertook a field study of a sample of lending and nonlending operations andundertook a desk review of selected OED’s energy sector reports relating to India. A summaryof the key findings and conclusions of the study is documented below. Further details arepresented in Appendix 6.

A. Generation Sector

55. ADB approved four public sector-financed power stations in India: two at North Madras,and one each at Rayalaseema and Unchahar in the period 1986 to 1990. All projects were rated“successful.” All addressed power shortages and allowed for more efficient use of generationresources. The choices of technology for the projects were well proven and the operatingefficiencies of the plants are high. However, these gains were not achieved without delays:

(i) The first North Madras project was held up by ineffective coal handling systems,which problems were not resolved until the follow-on project was completed.

(ii) The Unchahar Thermal Power Project was approved in 1998 with Uttar PradeshRajya Vidyut Utpadhan Nigam (UPRVN) as the Executing Agency. In February

1992, NTPC took over the power station from UPRVUN as part of a settlementfor amounts owed to it. After the takeover, NTPC identified many shortcomings inthe implementation and management of the project. Various changes wereimplemented over the next 2 years and new equipment was commissioned. Thatled to availability and plant load factors of greater than 92% by FY2004-2005.Subsequently, the entire plant has run at a very high plant load factor (95.7% inthe FY2005-2006) and is described by NTPC as a jewel in its crown.



16

(iii) The Rayalaseema project suffered form inefficient use of suspended particulateremovers due to inefficient operations and maintenance. These issues havesubsequently been resolved.

56. ADB used its Private Sector Infrastructure Facility to fund two loans to Industrial Creditand Investment Corporation of India and Industrial Finance Corporation of India, each of which

supported private sector funding of nine generation subprojects totaling 1,806 MW. 23 Thegeneration subprojects were assessed to be operating at very high standards and all werecommercially viable. The facilities were also successful in promoting finance for private sectorinfrastructure, as ADB’s investment of $212 million catalyzed a further investment of $2.05billion. These loans were considered to be pioneering in the development of private sectorparticipation in the power sector.

57. All projects have benefited the socioeconomic well-being of the surrounding population,including to increase rural connections, and particularly for irrigation, street lighting, and localemployment. Subsequently, there has also been a more reliable supply for local industries.

B. Transmission Sector

a. Electricity Transmission

58. The transmission sector has been the major focus of ADB lending to India. Expandingnational transmission capacity was seen as an important means of increasing the effectivecapacity of the power sector, which was a major constraint on economic growth. ADB hasfunded both public sector-owned (Power Grid) and private-sector owned (Tala-DelhiTransmission Company) transmission expansion.

59. ADB lending to Power Grid included three loans with a total value of $925 million in theperiod 1992 to 2004.24 A further loan of $1 billion was approved in 2007. The projects havecontributed to upgrading the interregional transmission system, the power control systems, and

operations and management of the transmission system, as well as to developing in-houseenvironmental evaluation and monitoring expertise. These are all parts of plans to create asingle national grid by 2012. Loans to Power Grid were timed to extend and upgrade the grid,connect new supply to the grid, facilitate interregional transfer of power to optimize costs andoperations of the grid, and gain efficiencies in service delivery at a time of national shortages.The resultant increased system capability was insufficient to meet overall demand, andinterregional transmission still suffers from bottlenecks. Without the added capacity, however,shortages would have been worse. Both projects approved prior to 2004 were evaluated andfound to be satisfactory. The sector is operating at the world’s best operating standards, and ithas persistently improved its operating methods and efficiency.

60. In January 2000, the Government issued guidelines for private sector participation in the

transmission sector, and it identified two subprojects: a joint venture and an independent powertransmission company. The Government invited international competitive bids and selectedTata Power Company to construct and operate the joint-venture facility under a build, own,operate, and transfer agreement. In December 2002, ADB approved a local currency loan of

23ADB. 1996. Private Sector Infrastructure Facility (Loan Nos. 1480-IND and 1481-IND).

24ADB loans to Power Grid include: $275 million (Power Transmission [Sector] Project [Loan 1405-IND] approved in1995), $250 million (Power Transmission Improvement [Sector] Project [Loan 1764-IND] approved in 2000), and$400 million (Power Grid Transmission [Sector] Project [Loan 2152-IND] approved in December 2004), and $1Billion in 2007.



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$62 million equivalent to Tala-Delhi Transmission Limited, the largest private sector power utilityin India, and to Power Grid, the state-owned national transmission utility. The project consistedof power transmission lines from Siliguri in West Bengal to Mandaula near Delhi. The facilitywould enable power to be exported from the Tala Hydroelectric Power Project in Bhutan andallow transfer of surplus power from India’s eastern to its northern region. Tala-Dekli would build,own, and operate the transmission line for 30 years and then transfer it in accordance with an

agreement with Power Grid.

61. Power Grid wants to continue to borrow from ADB and is appreciative of the assistanceit has received. ADB’s financial involvement is viewed as advantageous, and Power Grid alsovalues the role ADB has taken as a catalyst for power sector reform. It feels that ADB’s adviceon developing its environmental standards and social policies and on designing its procurementprocedures has assisted with its institutional development. These factors, along with theadditional credibility that Power Grid gains as an ADB client, are also vital parts of the lendingrelationship.

b. Gas Storage and Transmission

62. ADB played a major role in the early 1990s enhancing the institutional capacity of Indianhydrocarbon public sector enterprises by introducing competition, initiating divestment ofgovernment equity in public sector enterprises, and initiating steps toward establishing aregulatory framework.25

63. To further the reform process, promote the use of commercial fuels, and provide theinfrastructure for meeting increasing demand for LPG in the north, ADB public sector funded anLNG pipeline from Jamnagar in Gujarat State to Delhi in 1997.26 The objectives of the projectwere to (i) improve the availability of LPG by addressing infrastructure constraints, (ii) minimizethe transportation cost of LPG, (iii) improve the environment by reducing energy consumptionand exhaust emission, and (iv) enable private sector importers and traders of LPG to accessinfrastructure that was historically captive for public sector companies. The outcomes of the

project significantly arrested environmental pollution through substituting gas for diesel and coalin the transport and generation sectors, respectively. The project also facilitated easy access toLPG supply and improved its reliability and availability. The project complemented the reformprocess by (i) establishing the principle of open access pipelines in India, (ii) unbundling gastransmission from trading, and (iii) developing commercial access contracts that can serve as amodel for similar projects.

64. The private sector-funded Petronet LNG project was the first step in liberalizing andcommercializing the liquefied natural gas segment of the Indian gas industry and in encouragingthe use of a clean, environmentally friendly fuel. The operating company has demonstrated thehigh standards of performance that can be achieved by a modern, well-run public-privatepartnership managed on a commercial basis. The business’ success has been excellent

because of lower than expected operating expenses and interest costs. Economic sustainabilitywas rated excellent because of the substantial benefits derived from meeting unmet demandand generating cost savings for firms that can use gas in place of diesel. ADB played a criticalrole in facilitating liberalization of the gas market and then helping mitigate investor and lenderconcerns in what was, in India, a new and untested product and technology and for which therewere limited skills and experience available locally.

25Gas Rehabilitation and Expansion Project.

26LPG Pipeline Project.



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C. Energy Efficiency and Renewable Energy

65. ADB has implemented energy efficiency initiatives, renewable energy projects, andclean development mechanism (CDM) initiatives that promote a reduction in greenhouse gases.Energy efficiency initiatives have multiple positive effects in (i) reducing input costs for capital

and materials required to produce the energy, (ii) decreasing the effect of greenhouse gasemissions on the environment, and (iii) increasing fuel security as imports are reduced. Thedirect recorded support for this sector has been very limited, primarily as ADB’s record keepingunderstates its contribution to energy efficiency. ADB has supported many projects thatcontribute to energy efficiency but are not recorded as such. Examples include the LNG pipelineproject described above and other projects that have upgraded overloaded transmission anddistribution. These efficiency gains led to reductions in technical losses and the correspondingdecrease in generation requirements contributed to energy efficiency, lowered the cost of supply,and led to a subsequent reduction in greenhouse gas emissions.

66. In 1996, a loan of $100 million was approved by ADB for the Indian Renewable EnergyDevelopment Agency (IREDA)27 to develop its expertise to promote and fund renewable energy

(RE) technology in India. This project funded 318 MW of wind, biomass cogeneration, landfillgas, and solar energy projects. It significantly avoided increases in emissions that wouldotherwise have been produced by coal-fired plants. The project has had a catalytic effect onfunding for the renewable energy sector, and it has led to sustainable private sector investmentand financing of wind generation. IREDA has become a successful source for ongoing financingof new RE projects, although competition from commercial banks and a lack of inexpensivelocal funds has greatly reduced their capacity to fund wind power projects. Expertise gained byIREDA has led to its being recognized as the leading source for appraisal of RE projects, and itenables the Agency to successfully fund viable cogeneration, solar, and landfill gas generationprojects. Additional effects were noticed during site visits. These included start-up economicactivities, in such areas as cane transportation, lignite storage, industrial security services, teastalls, as well as vehicle maintenance and repair units and/or shops. Direct and indirect

employment for semiskilled and unskilled people resulted in quality of life improvements foremployees and their families. Discussions with managers and employees of selectedsubprojects indicated gains in average household monthly income from Rs1,000 to Rs7,000.Development of access roads to the subprojects led to improved connectivity for villages withtown and/or district headquarters.

67. Financing for the State Power Sector Reform Project was approved in December 2002.PFC was the borrower. The original loan amount was $150 million but only $50 million wasdisbursed and the balance of the loan was cancelled at PFC’s request. The objective of the loanwas to support investment in state electricity boards that were committed to power sector reform.The loans were targeted at projects to improve system operations and reduce system losses inpower plants and in transmission and distribution. However, the loan did not achieve the level of

intended outcomes. The scope and level of detail in the loan conditions were major factors incancelling $100 million of the approved loan. Both PFC and the state electricity boardsthemselves could borrow funds from other sources more easily and at rates similar to ADB’s.

68. Assistance through ADB-funded TA28 has produced a framework for developing energyefficiency initiatives for the Bureau of Energy Efficiency (BEE). The recommendations in the

27Renewable Energy Development Project.

28Preparing the Energy Efficiency Enhancement Project.



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consultant’s report were being fully implemented by the BEE as policy with the state electricityboards and community organizations as implementing agencies. Included in the initiatives wereenergy efficiency labeling programs, the development of accreditation for energy auditors, andthe development of pilot projects to demonstrate the benefits of energy efficiency. The TAdeveloped monitoring and verification protocols and pro forma contracts for performance-basedcontracting of electricity supply companies (ESCOs). Both of these have been used by other

projects since completion of the TA to execute contracts with ESCOs. In addition, the TA hasresulted in an innovative financing mechanism to catalyze domestic financing for energyefficiency that would be better and more sustainable for India. The study rated the outcomes as“successful” and “highly sustainable.” The ongoing success of the program will rely on fundingavailability and implementation of the energy efficiency initiatives by the state electricity boardsand states. There is considerable scope to include further energy efficiency initiatives in futuresector lending.

69. TA supporting the development of clean development mechanism29 is still in progress. Ithas identified several projects to be used as pilot projects as well as developing a toolkit toevaluate potential projects. The field study found considerable progress had been made andmunicipalities and financial institutions had been involved in workshops and consultations. The

outputs of the TA support ADB and Indian national energy policy initiatives and can providefurther incentives to broaden appreciation for this initiative.

a. Energy Efficiency and Tariffs

70. Demand-side initiatives, and in particular time-of-use (TOU) tariffs, have been successfulin improving resource use in several states. In the State of Gujarat, the state electricity boardbifurcated all rural feeder lines. Agricultural consumers now receive power for 8 hours a day, offpeak, at a concessionary rate. Rural households and villages are supplied continuously from aseparate feeder. Because agricultural power is no longer supplied at system peak, 500 MW hasbeen removed from the peak load and the load curve is almost flat. This load pattern improvesthe efficiency of the power sector and reduces the need to invest in peak load generation

capacity. Households now have continuous supplies while farmers appreciate the improvedreliability for the 8-hour connection period and have accepted the change. In the State of Assam,an optional time of day tariff was introduced. This moved about 7% of demand away from thesystem and made the load curve significantly flatter. Consumers appreciated the new tariff andthe resulting improved reliability of supply.

D. Power Sector Development Programs

71. Power sector reform is a major component of the Government’s plans to develop asustainable energy sector. ADB has provided considerable support in this area. The field studyreviewed the power sector lending programs and associated technical assistance grant projectsin Assam, Gujarat, and Madhya Pradesh. These three states had earlier received assistance

from ADB’s public resource management programs that focused on revenue reforms, publicsector reforms, and creating an enabling environment for public-private sector participation.Subsequent developments included debt management and expanding the level and sources ofrevenue generation to sustainable levels.30

29Capacity Building for Clean Development Mechanism.

30ADB. 2007. Special Evaluation Study on Selected Resource Management Programs in India (forthcoming). Manila.



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1. Gujarat

72. ADB program (Loan 1803-IND) and project (Loan 1804-IND) loans for the Gujarat PowerSector Development Program were approved in December 2000, along with technicalassistance grants. The project loan for $200 million funded investments by the Gujarat StateElectricity Board for transmission lines, substations, upgrading of distribution, and a pilot

scheme for drip irrigation. Three technical assistance grants were included in the program,covering the preparation of a reorganization plan for Gujarat Electricity Board (GEB), consumerawareness and participation in reforms, and support to the Gujarat Electricity RegulatoryCommission. These technical assistance projects supported key aspects of the reform programand have all influenced the course of the reform program.

73. The lending and technical assistance package offered by ADB was well prepared andoffered comprehensive incentives to implement a reform program. It provided both GEB and theGujarat state government with funding to enable implementation of reform and the technicalassistance needed to ensure that the program was well designed. There is now a very highlevel of ownership of reforms in the successor entities that have replaced the GEB. The reformprogram for the power sector in Gujarat was well advanced but not completed at the time of the

field visit. State government approval was still awaited for some aspects of asset transfers.Although assets and liabilities had all been allocated to the new companies, the holdingcompany was still acting as a corporate treasury.

74. Further capacity building is needed to enhance the skills of employees. Tariff reformcontinues under the 2003 Electricity Act, with open access planned from 2009. The distributioncompanies recognize the need for further reductions in technical and distribution losses.Although they have fallen in the last 2 to 3 years to an average of 26–27% in the state, lossesremain very high in the Western (44%) and Northern (32%) distribution companies, which havemany agricultural consumers. Rural electrification remains a major challenge.

75. There are a number of factors that contributed to the rapid success of the Gujarat reform

program. In addition to the well-structured support package offered by ADB,(i) there was already agreement between state government and the utility before

ADB became involved on the need for restructuring and the approach to adopt;(ii) there is a broadly commercial culture in the State of Gujarat;(iii) staff accepted reforms as a result of tripartite agreements between the state

government, the utility, and unions;(iv) metering is now compulsory for all consumers, enabling greatly improved

monitoring of losses;(v) a growing industrial sector in Gujarat is keeping revenue buoyant;(vi) there were significant opportunities for cost reduction and performance

improvement;(vii) tariff levels and structures have been adequate to sustain cash flow;

(viii) the quality of regulation has been good;(ix) the regulator has appropriate expertise and has pressed for improvements in

performance.

76. The financial and organizational restructuring have turned around the finances of GujaratState Electricity Board so that it has gone from being a loss-making enterprise to a profitableorganization. This occurred without an increase in tariffs over a 4-year period and with highlevels of state government support for reform. While Gujarat provides an excellent model of howpower sector reform can progress and how ADB can support that process, it would be



21

unrealistic to expect all other states to progress as far or as quickly. The study rated the overallprogram and project loans together with the associated TA as ”successful” bordering on ”highlysuccessful.”

2. Madhya Pradesh

77. ADB approved a policy loan of $150 million (Loan 1868-IND) and an investment loan of$200 million (Loan 1869-IND) to support the Madhya Pradesh Power Sector DevelopmentProgram in November 2001. The strategy for reform originated in a study prepared in 1997 forthe Madhya Pradesh state government which recommended unbundling, independentregulation, private investment, and greater commercial efficiency. This was followed by a clusterof six technical assistance grants, funded by ADB and CIDA to prepare more detailed reformprograms and continuing policy dialogue between the authorities in Madhya Pradesh and ADB.

78. Restructuring has proceeded and the sector now has a regulator, the Madhya PradeshElectricity Regulatory Commission. The Madhya Pradesh State Electricity Board (MPSEB) hasbeen separated into a generation company, a transmission company, three distributioncompanies, and a power trading company. MPSEB is still in existence, with a number of roles

such as keeping old liabilities on its books, handling old litigation, and employing all staff.

79. Because of extensive preparation, MPSEB was ready to proceed when the loan wasapproved. MPSEB obtained very competitive prices in FY2002-2003 when suppliers were shortof work. This led to savings of $54 million compared to budget, which was reallocated to furtherworks. The reallocation and associated procurement arrangements were agreed promptly withADB. MPSEB is generally satisfied with the impact of the technical assistance funded under theprogram. The sole exception is a human resources project that produced few results.

80. The beneficial impact of the ADB loan for the transmission system can be seen clearly.Overloading of transformers now affects only four substations, compared to 58 when theprogram began. Transmission losses have come down from 7.93% in 2002 to the current level

of 5.22% and should fall further to 5%. Availability is now 98.4%, compared to 95% in 2002.ADB funding provided the testing technology necessary to enable the transmission company toundertake preventive, rather than reactive, maintenance. The impact is less apparent at thedistribution level, which received less comprehensive attention than did transmission. However,a distribution pilot project in one area, involving 33x11-kilovolt transformers and capacitors, wasa success with better voltage and transformer loadings and improved metering. MPSEB hopesto extend this approach and also to bifurcate some rural feeders.

81. Major problems exist in preventing electricity theft. There are about 40,000 cases in thecourts relating to such theft. The courts cannot cope with the volume of cases and judges areslow to reach decisions. These delays may impede improvements in commercial performance.

82. A further loan to the Madhya Pradesh power sector for $620 million under a multitranchefinancing facility (MFF) has recently been approved.31 The South Asia Department responsiblefor negotiating the loan consulted with OED to access the preliminary findings addressed by thisSAPE. All concerns raised in the SAPE with respect to governance and risk managementissues have been fully addressed by the new MFF. DFID is addressing accounting andinformation technology issues with a separate loan. The study rates the outcomes of the TA and

31ADB. 2007. Proposed Multitranche Financing Facility Madhya Pradesh Power Sector Investment Program (Loans 2323/2324-IND).



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project loan “successful,” bordering on “highly successful,” whereas the program loan is likely tobecome successful given the additional coordinated assistance of ADB and DFID

3. Assam

83. ADB approved a policy loan (Loan 2036-IND) of $150 million and an investment loan

(Loan 2037-INd) of $100 million for the Assam Power Sector Development Program inDecember 2003. The loans were supported by TA, which was administered by ADB butfinanced by DFID. Two previous ADB TA grants had prepared the way for the loans bysupporting development of a power sector development program and capacity building in theAssam Electricity Regulatory Commission. The most important effect of the restructuring hasbeen the financial turnaround of the Assam distribution sector, which raised revenues andreversed its cost increases (Figure 3).

84. The Assam State Electricity Board (ASEB) has benefited significantly from technicalassistance, both before and since the ADB loans were approved. In order to sustain reform,ASEB will undoubtedly continue to need consulting support, certainly for the next 2 to 3 yearsand perhaps longer. The capacity of the new companies needs to be developed in many areas,including finance, information technology, human resources, and core engineering capabilities.Many ASEB staff are not accustomed to the business practices of a modern utility and it hasbeen a challenge for the consultants to ensure that ASEB staff are fully engaged withTA-provided consulting projects, as distinct from attending associated training courses.PricewaterhouseCoopers seems to have had more success in providing process consultingsupport that engages with ASEB staff, and it is this type of assistance which ASEB needs in thefuture in order to develop its capabilities for running a modern, consumer-driven utility.

85. The Assam state government was concerned that the split into three distribution

companies may not have been optimal and there are concerns about the required future staffexpertise and numbers which, together with unbalanced customer mixes, may lead to at leastone distribution company’s being unsustainable. An ADB-funded report by PA Consultingrecommended three distribution companies. This was accepted by ADB, the state government,and ASEB, and it is incorporated in loan covenants as a restructuring commitment. There hasbeen continuing discussion, however, over whether it would be preferable to have a singledistribution company. The field study sighted conflicting information regarding this issue that

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Figure 3: Declining Losses in Net Revenues



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both supports and contradicts the concerns. It recommends that this issue be reviewed andresolved as a matter of urgency.

86. Assam wants and can effectively use more ADB loans. There is potential for rapiddemand growth, which requires more transmission capacity and significant performanceimprovements in distribution. The reform program is clearly incomplete, and ADB should

continue to be involved in setting covenants that promote further improvements and in financingboth investments and TA. The study concludes that the program loan and associated TA aresuccessful. The project is not complete due to earlier delays, but it is showing early indicationsof a successful outcome.

4. General Observations on Power Sector Development Programs

a. Sector Governance

87. Sector governance has improved significantly in the three state electricity boards whereADB has provided assistance. As part of the efforts to improve the transparency of theirmanagement and accounts, the distribution companies are starting to computerize their financial

and management information systems with the initial focus on billing. Financial restructuring,unbundling, and the need for new accounting for the new corporations set up by the stateelectricity boards have led to numerous problems with accounting (Appendix 7). However, someof the timeframes set by ADB covenants for setting up independently audited accounts mayhave been overly optimistic, both from the technical and staffing capabilities viewpoints.Unaudited manual accounts and asset registers and a lack of information technology skills havemade progress toward sound financial reporting systems slower than anticipated

88. ADB often imposes financial covenants on borrowers in two areas: the provision ofaudited accounts and the level of receivables from customers. These are both important areasof governance in which it is sensible for ADB to impose covenants. In a commercialenvironment, audited accounts should be available within 3 months of the end of the accounting

period to which they relate. Rates of progress and accounting and auditing standards are muchtoo low in the states. Accounts for the state electricity boards are unreliable in some areas andslow to be produced. In accordance with statutory requirements, they are audited by theController and Auditor General, who often finds shortcomings in the accounts and is also slow.For example, as of mid-2006, the state electricity board in Madhya Pradesh had only reachedthe draft accounts stage for the year ending March 2005 and figures were still awaiting auditreview. Moreover, review of the recent accounts for ASEB suggests that some of the figures aredoubtful even when they have received a clean audit opinion.

89. State regulatory commissions in India found that the finances of the state electricityboards were unsustainable, as a large farm sector had no metering of its power consumptionand was supplied power at a nominal tariff. There were also large transmission (technical) and

nontechnical losses (39% in the case of Madhya Pradesh). The regulatory commissions foundthat most of the corruption in the retail supply revolved around metering and billing. This wasamong the first issues addressed in the reform process, and the regulators in each of the statesvisited by the operations evaluation mission (OEM) were jointly setting loss reductions targetswith the distribution companies. Within the distribution companies the most critical issue isperformance improvement—and in particular reducing losses. A lack of functioning meters, theft,and nonpayment of bills remain big problems, and all the distribution companies are makingslow progress in reducing these losses. Metering of all consumers is progressing well generally,but in states funded by ADB none has yet achieved the 100% that was targeted. The increased



24

metering levels are nevertheless a major factor in the decreasing gap between revenues andcosts (Appendix 8).

90. With respect to the electricity industry, ADB has correctly identified the major sources ofcorruption; petty theft on a grand scale plus high-value procurement kickbacks and politicallydriven intervention on a smaller scale. All of these have been addressed through governance

measures in recent loans (i) electricity theft is being reduced through governance measures thatinclude matching of feeder loads and meters; (ii) the unbundling of utilities allows forcomparisons of financial performance and disaggregation of costs and revenues by utilityfunctions, and (iii) regulators’ introduction of consumer inclusivity promotes and enforcesconsumer interests in transparent decisions. These measures are relatively permanent, as theyare applied at the institutional level and have very high levels of success. Moreover,procurement is increasingly being made more transparent through the likes of transparentinternational competitive bidding, ADB’s monitoring and control systems, and, where deemednecessary, by using international procurement experts with specific industry knowledge.

91. Pilot schemes are being initiated to demonstrate the effects of monitoring andreconciling billing with meters, decentralizing transformer maintenance and parts procurement,

and providing customer service centers. The benefits of increased metering and monitoring arebeing realized through faster identification of nontechnical losses and matching transformer datawith computerized billing of meters. A pilot project in Assam reduced losses in a feeder withmainly industrial customers from over 65% to 6% in only 4 weeks after the controls wereestablished (see Figure 4). A similar pilot project reduced transformer failures in one districtfrom an average of 12% to 0% over a 22-week implementation period. Other innovative ideasare being implemented to try and reduce losses, such as franchising supplies wherein thefranchisee undertakes billing and collection.

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b. Regulation

92. In India, the creation of independent regulation has proven to be a significant help inremoving the politics from tariff setting and creating an environment in which the power sectorcan become more commercially focused. Regulators at both central and state levels aredemonstrating clear independence and using the internet and publicity materials as vehicles for

Source: Assam State Electricity Board.

Figure 4: ASEB Pilot Loss Reduction Scheme



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transparency. Appointment processes are sound, and regulators are moving toward financialindependence by collecting revenues from the utilities rather than through state budgets.Considerable effort is being expended to communicate responsibilities and independence. Forinstance, the Central Electricity Regulatory Commission and the three state regulators visitedduring the evaluation study ensure that official communications (relating to state or centralgovernments and their agencies) to, and from, their commissions are made public through their

official websites. Consumer participation in regulatory processes was being mentored by theregulators, and the regulators take into account both supply- and demand-side concerns. Stateand central regulators are increasingly taking a performance-based approach for setting rates,although the major revenues portion is still established on a normative cost-plus basis.32 Stateregulators are taking a normative approach to managing costs and set agreed targets with thedistribution sector for loss reductions, collection efficiencies, and merit order dispatch of state-owned generation assets.

93. Funding and encouraging independent regulation has been a key factor in promotingcommercial practices. Regulators are learning from one another and from international bestpractice. In discussions during the evaluation, regulators raised issues related to financiallycompetitive salaries, career structures for regulatory staff, staff training, developing methods to

achieve financial independence, and means of sharing information about best practice.

c. Staffing

94. Staffing issues have complicated restructuring. There has been little or no recruitmentfor many years and, as a result, the workforce is aging with many staff approaching pension age.There are relatively few younger staff with the skills in information technology and financeneeded to run a modern utility. This has created many problems for all state electricity boards.For example, most of the linemen in Assam are aging and no longer able to climb poles. Clericalstaffs have no experience in working with computers. Another urgent problem associated withthe aging workforce was that large unfunded pension liabilities had to be transferred to theunbundled companies. This has been achieved in the three states visited as part of the field

study through a mixture of (i) partial state assumption of the liabilities; (ii) using part of ADB’sassistance to the sector; and (iii) in the case of Assam, through a regulatory approved increasein energy tariffs.

E. Client Feedback

95. EAs reported that the transaction costs of ADB environmental and resettlementsafeguard procedures have been found to be high relative to both the benefits and the EAs’capabilities to bear the costs. A key reason is that in many cases EAs have to comply with bothnational and ADB procedures, causing a duplication of effort. The inefficiency is compoundedbecause, in many cases, ADB’s safeguard activities are heavily reliant on the national processbut separate from it. Inconsistency in the timing of environmental assessment also undermined

the value and efficiency of ADB’s activities. ADB assessments were often undertaken beforeadequate information was available, or after all key design decisions had been made.

96. The relatively high transaction costs, as perceived by EAs and government officials,include the direct costs of meeting ADB’s procedural requirements (e.g., preparing

32At present, in the cost-plus structure, Central Electricity Regulatory Commission generation regulations provide forrecovery of full fixed charges at 80% availability and incentive payment above 85% availability, subject to actualdispatch. Normative financing has been set at a 30:70 equity to debt ratio, and regulated assets are allowed a 14%return on their equity.



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environmental impact assessments and resettlement plans and the costs of delays caused bythe slow approval process within ADB). The transaction costs are particularly severe for sectorloans and some emergency loans that have many small subprojects, each of which requirespreparation of a summary initial environment assessment at substantial time and monetarycosts but often with limited additional benefits. Efficiency is further decreased by the focus ofADB’s procedures on front-end processing with little emphasis on outcomes through

implementation and value addition. Dissatisfaction with this process led to the cancellation ofone project loan in India by the borrower.

97. The evaluation notes two different experiences with international competitive bidding. Insome cases there were considerable savings (e.g., in Madhya Pradesh, $54 million), but inother instances costs increased as the EAs were prevented from negotiating after bid closure.International competitive bidding requirements and ADB approval procedures are often criticizedby EAs as creating additional costs and not being suited to local conditions. For instance, ADB’sdisbursement process has been described as very time-consuming and complicated. Executingagencies raised concerns regarding the process of international competitive bidding where alocal supplier had to use an intermediary to meet the requirements. Subsequently, the deliveredprice was higher than if procured locally due to additional commissions to the intermediary.

98. Compliance with covenants, and particularly financial covenants, and the timing ofdeliverables such as audited accounts have in some cases unreasonably delayeddisbursements to the EAs (e.g., Madhya Pradesh, PFC). This was an issue raised by EAs thatwere undergoing restructuring. They indicated that the process itself was delayed and hence thetimetables set were unrealistic. A more flexible approach that would interpret the spirit of thecovenants rather than imposing the letter of the law has been suggested by several EAs.

99. Power Grid asserts that ADB attempts to exercise too much control over the detail of itsdecisions. It finds ADB less flexible than the World Bank or the JBIC and wants more autonomyover spending decisions, to be permitted to fund projects retrospectively, and to be allowed todecide which projects to fund with ADB resources when the loan is made and not as a prior

commitment in lending covenants. It feels that ADB’s commitment charges are high and that thenotional disbursement schedule upon which they are based is inflexible and often not realisticfor the projects that are being funded. It also finds some ADB conditions irksome—for example,being asked for a resettlement plan for a transmission line project when it is not the company’spolicy to acquire land but rather to pay compensation for crop losses.

100. ADB’s client portfolio in India includes a number of companies, such as Power Grid andPFC, which are well run and sophisticated organizations that are now able to borrow in capitalmarkets. Inevitably, such enterprises look at the conditions on lending imposed by ADB andcompare these with their own policies and procedures as well as the conditions imposed byother lenders. In some cases, they regard ADB’s conditions and procedures as unnecessaryand unduly complex. For example, commitment fees assume a schedule of disbursements that

may not be achievable in practice. Moreover, ADB requires a negative pledge in addition to asovereign guarantee even when a borrower is sufficiently creditworthy.

101. These comments are highly positive for ADB in the sense that they show clients areevaluating borrowing conditions from an intelligent commercial perspective. Moreover, ADB hasshown itself responsive to similar comments as when it removed requirements for sovereignguarantees, which were costing 1.2%, on loans to Power Grid and NTPC.



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102. The SAPE notes that many of these issues have been resolved through changes inprocedures and requirements and the remaining issues perhaps may be resolved with moredialogue and the inclusion of more flexible mechanisms. It concludes, however, that ADB’sclients are often not aware of the changes and recommends that the changes be presented, asa matter of urgency, to EAs or related government agencies in India with whom ADB hasintentions to develop further lending projects.

IV. EVALUATION OF ADB ASSISTANCE

A. Bottom-Up Assessment of ADB Assistance

103. This bottom-up assessment of performance in the energy sector is based on the fiveevaluation criteria of relevance, effectiveness, efficiency, sustainability, and impact. Thesecomponents are summarized at the conclusion of this section to provide an overall assessment.

1. Relevance

104. Relevance of ADB assistance to the energy sector was assessed in terms of

consistency with ADB’s sector and country strategies, alignment with national priorities, anddonor coordination. The energy sector has been a continuing focus of attention for both theGovernment and ADB. Both ADB strategies and the Government’s national plans consistentlyemphasize energy shortages and the importance of increased supplies to India’s overalleconomic development. Access to energy is seen to be the largest impediment to thecommercial and industrial sectors’ development, and 35% of all companies surveyed by theWord Bank in 2006 indicated that this was their foremost concern. By international standards,the 85 days of power outages that occur in India per year compare poorly with OECD countries(1.5 days) and East Asia (8.9 days). Hence, providing additional infrastructure to reduce thisobstacle is relevant to increasing private sector participation in the country, and these are policyobjectives jointly held by ADB and the Government.

105. At the same time, there was recognition in ADB’s country strategies for India that fundingneeds to be linked to reform. The poor performance of many state electricity boards was acontinuing theme throughout the 1990s. The failure of the original EA for the Unchahar projectillustrates the problems. In recent years, however, and certainly since the passage of the 2003Electricity Act, ADB and the Government have been pursuing fully consistent policies that areclearly aligned with ADB’s energy policy (Appendix 3, Table A3.2). The state-level interventionsall have been designed to support significant reform efforts. These programs have been wellcoordinated with other development partners. There is a satisfactory division of labor betweenADB and the World Bank. Where additional assistance has been needed, ADB has coordinatedwith other donors, such as DFID and CIDA, to bring additional funding to the programs.

106. The program loans supported the Government’s overall economic reform agenda with

the states, and were consistent with the Ninth and Tenth five-year plans (1995–2000 and 2001– 2005) and other national policies. There was agreement for multilateral funding agencies suchas ADB to provide support directly to state governments. The assistance effort built on therecommendations of the states’ own analysis of solutions for their fiscal conditions and resultedin strong state ownership of reform programs. The program loans were consistent with ADB’sinstitutional development objectives of supporting economic growth and with its India countrystrategy, and in particular on reducing infrastructure constraints by (i) supporting development ofan effective policy, regulatory, and institutional environment; (ii) improving infrastructure



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availability and service quality while promoting environmental upgrading and protection; and (iii)targeting social sector interventions.

107. ADB’s assistance focused largely on the weakest links in the provision of electricity, i.e.,the state electricity boards. This subsector had suffered the most from policies designed toimprove the livelihoods of the poor and improve the agricultural sector so as to make India self-

sufficient in food. This is still the weakest sector, and recently approved MFF loans toUttaranchal and Madhya Pradesh indicate ADB’s continued relevance. The Government hassignaled that it is seeking future assistance with significant value-added knowledge components,as it seeks to further modernize its power sector. This points to a shift from pure infrastructurefunding to a wider technological response, and particularly in the areas of energy efficiency,CDM, and renewable energy. Provided ADB staff capabilities match this need, ADB willcontinue to be relevant to the sector. Overall, the SAPE concludes that the assistance was“highly relevant”, with shortcomings in projects from the 1990s being overcome in the mostrecent interventions.

2. Effectiveness

108. Effectiveness was examined in terms of achieving immediate objectives for ADBassistance to the energy sector. ADB assistance has been effective in removing manybottlenecks to the delivery of power to businesses and households through improvements ingeneration capacity, the grid, and local distribution systems. It has been well focused on priorityneeds. However, the overall objectives of the effort, in terms of making good quality and reliablepower available to all consumers, have never been met because demand has always grown atleast as fast (and often faster) as has supply capacity. The fact that so many elements of theprogram have been subject to delays, or, in the case of the loans to PFC and Gujarat, that loanshave been in part cancelled, has reduced the effectiveness of lending compared to objectivesset at the time of appraisal, and this has contributed to supply shortfalls.

109. The evaluation observed that there was a considerable period of time before lending

commenced to the states targeted for assistance, and this appears to reflect a fundamental andsuccessful change in procedural strategy. Initial assistance was preceded by extensive policydialogue that was used by ADB, the state electricity boards, and the state and centralgovernments to develop clear road maps and consensus for the expected outcomes of theassistance. The reforms in Gujarat and Madhya Pradesh preceded the 2003 Electricity Act, andin both states independent regulation was introduced as a result of the public resourcemanagement programs initiated by ADB.

110. This was followed by a limited number of TA projects to prepare the groundwork andensure there was sufficient capacity building for the major programs and projects to follow. Theuse of conditional tranches ensured that commitments were largely met. The clearimprovements in both the state electricity boards’ financial positions and their completion of

ADB-funded projects with minor delays reflect good planning by ADB and a high quality ofprojects.

111. External assessment of the states by CRISIL and ICRA in 2006 (Table 7) verifies theconclusions about the effectiveness of ADB assistance. Gujarat is ranked as the second best



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state in India in respect to performance.33 ADB’s support in commercializing the state electricityboards in Gujarat and Assam has led to increases in their rankings relative to other stateelectricity boards. Madhya Pradesh has had mixed success. It has unresolved legal issuessince the split-up of the state that have made its financial position unclear, and, while thegeneration and transmission sectors in Madhya Pradesh have made considerableimprovements, the distribution sector has improved at a much slower rate than have those in

other leading states.

Table 7: Relative Rankings among 28 State Electricity Boards

Gujarat Assam MadhyaPradesh

2003 6 21 172006 2 11 20

Sources: CRISIL and ICRA.

112. ADB assistance has been least effective in the areas of human resource developmentand in attaining the desired quality of governance in the distribution sector, including in relation

to management and accounting practices. However, the high level of success in effecting policychanges, which resulted from (i) the preceding public sector reform programs, (ii) the covenantswith high hurdles, and (iii) the conditional release of tranches upon meeting these covenants,have proven this to be a successful approach to ensuring policy changes. Overall the ADBassistance to the energy sector is rated “effective.”

3. Efficiency

113. Efficiency was measured by the extent to which ADB’s resources provided to the sectorhave been optimally utilized. This assessment is based on three major considerations (i)evidence of improvements in sector policy and operations, (ii) high economic rates of return atproject level, and (iii) low cost of assistance program delivery. ADB assistance has had a

considerable positive impact on the three states in which it has actively pursued policy changes,and this has led the way for further improvements in the financial viability of the power entities.Institutional change has contributed to improving sector governance at state level and in somecases there was a clear evidence of reducing electricity thefts.

114. The economic internal rates of return (EIRRs) of those completed projects evaluatedwere higher than 12%, implying economic efficiency in resource allocation and use. The EIRRsof the project or program completion report (PCR) performance evaluations ranged from 13% to31.5%. All exceeded ADB’s benchmark of 12% for successful projects, and some exceeded the18% that is the benchmark for highly successful projects.

115. Average delay in project implementation in India was significantly shorter (6 months)

than that of all other energy projects (13 months) in the period 1995–2005.34

That assistanceprograms were well focused, taking into account executing agency capabilities, has been amajor factor in the timely completion of most lending and TA projects. Sixteen out of 18 rated TAprojects were also found to be “successful.” All things considered, the assistance is rated“efficient” (Appendix 8). The study notes that the majority of the TA projects rated were for

33Performance is rated on external factors such as development and compliance with regulatory processes, the levelof business and financial risks, progress in attaining commercial viability, sustainability of revenue and the creationof a competitive environment. A ranking of 1 indicates the highest score on these factors.

34Operations Evaluation Department database.



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advisory TA, thus supporting the program loans and sector reforms. This suggests that asignificant contributing factor to the overall successful outcomes of the program loans can beattributed to the preceding policy discussions and the quality and timing of the TA.

4. Sustainability

116. The sustainability criterion focuses on the likelihood that the achievement of sectorresults and benefits will be sustained into the future. Where information was available, thefinancial internal rate of return was generally greater than the weighted average cost of capitalat the time of project completion reports and/or project performance evaluation reports. In onecase, because of the tariff subsidy, the financial rate of return was negative.35 The assistanceADB has provided to central power utilities such as Power Grid is clearly sustainable in that thecompanies are well run, operating on a commercial basis, and now able to access funds frommarket sources as well as development partners. NTPC is now a publicly listed firm on theBombay Stock Exchange and is developing a portfolio of nonsovereign loans. The sustainabilityof change in some of the state power sectors is inevitably a little uncertain. While Gujarat nolonger requires significant support, there are continuing issues in both Assam and MadhyaPradesh over the ability of the utilities to complete reforms. Reforms in these states are still

works in process, although substantial progress has been achieved. Moreover, success cannotbe defined only at the individual utility level but must also be considered at the sector level—andthere are continuing financial shortfalls. Institutional changes have been made across the sectorwith the backing of state and central government policies, and the observed high level ofownership of the changed institutional structures points to a sustained effort to improveefficiency and governance in the power sector. Overall the assistance is therefore rated “likely”to be sustainable.

5. Impacts

117. This criterion refers to the contribution of ADB assistance to long-term changes indevelopment conditions in the sector. The broader long-term impacts of the changes cannot be

established at this stage, but there has been a major turnaround of the power sector finances inthe three states where ADB has provided assistance, there are demonstration effects, and ADBexperience is now being extended to other states.

118. The major impacts of the ADB assistance are summarized below:(i) Financial restructuring, tariff restructuring, and lower costs have reduced the

need for subsidies. This means fewer funds are required for the power sector,leaving more fiscal space to support other social sectors.

(ii) The improved quality of supply has increased the reliability of supply. This is amajor attraction to industries that are heavily reliant on secure energy supplies,(such as the information technology industry) and will impact more highly on thedeveloped states.

(iii) The demonstration effects of renewable energy projects have made some of thissector self-sustaining.(iv) The concurrent development of expertise and regulators' independence,

transparency, and consumer advocacy is removing political interference andproviding a balance between the needs of consumers and the industry. This hasled to consumer involvement and a shift to a service focus from a supply focusacross many of the states.

35Rayalaseema Thermal Power Project.



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a. Social Impacts

119. During the evaluation, a customer survey was carried out to examine the socioeconomiceffects of the structural changes in the three states where ADB has extended significantassistance for sector restructuring. The survey extended earlier completed surveys by

Santhakumar (2006),36 which sought to establish the basis of support or rejection of privatizationin the electricity industry and to gauge effects of the changes in states where state electricityboards were being restructured (Appendix 4).

120. The survey results for the three states where ADB has provided assistance reveal that (i)power shortages still occur;37 (ii) the quality of the power as measured by voltage fluctuationshas improved; and (iii) the public has perceived a marked improvement in the quality of service,such as relates to billing and responses to consumers concerns from the state electricity boards.Although there is relatively little opposition to privatization in all three states, householdconsumers in more affluent areas who receive a disproportionate amount of subsidies constitutethe single largest group opposing reforms. Industrial and commercial organizations stronglysupport, or do not oppose, privatization of the electricity industry. The survey also indicates that

where consumers were paying close to the cost of supply, they were willing to pay additionalcosts to increase the quality of supply.

121. More than 95% of the consumers in all states can avail themselves of alternativesources and/or equipment whose costs per unit of energy are lower than that of the centralizedelectricity supply. This has important implications. Electricity costs must be reduced significantlyor government subsidies may have to continue in order to sustain the current quality. This isalso directly attributable to the large extent of nontechnical losses.

6. Overall Bottom-Up Rating

122. The overall rating has been derived from the average of all evaluated project and

program loans. Seventeen of 20 public sector loans evaluated were rated as “successful” to“highly successful.” A review of TA projects indicates a higher success rate than for the loansand adds support to the overall score of 18 (Table 8).38 All the private sector projects evaluatedwere rated “successful.” Therefore, the study concludes that the lending and nonlendingassistance was “successful.” A detailed evaluation breakdown by project is in Appendix 9.

36Santhakumar, V. 2006. Unpublished Thesis. Poverty and Social Impact of Power Sector Reforms in India. India.

37This is consistent with the continued shortfall of power reported earlier, particularly at peak times.

38Sector performance (bottom-up) is rated as follows: highly successful, a score of 20 or higher; successful, 16–19;partly successful, 11–15; and unsuccessful, 10 or less.



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Table 8: Overall Bottom-Up Rating of Public Sector Projects

Criterion Evaluation Rating Rating Scale SAPE RatingRelevance Highly Relevant 0–3 2.9Effectiveness Effective 0–6 4.3Efficiency Efficient 0–3 2.1

Sustainability Likely 0–6 4.7Impact Substantial 0–6 4.0

Overall Successful 24 18.0SAPE = sector assistance program evaluation.Source: Operation Evaluation Mission. Sector assistance program evaluation team.

B. Top-Down Evaluation

123. A top-down perspective is used to assess and rate ADB’s sector positioning, the overallcontribution of the assistance effort to sector development results, and the quality andresponsiveness of ADB’s services. It assesses whether or not ADB’s choices of subsectors and

of partnership arrangements were appropriate, given evolving country requirements andpriorities. In light of that positioning, it assesses the extent to which the sector assistance’soverall contribution to development results was as great as could have been reasonablyexpected. It then assesses the quality of the services ADB provided to influence the delivery ofdevelopment results.

1. Power Sector Development

124. ADB’s operational strategy in India’s energy sector evolved from the second half of the1980s before economic reforms were implemented to open up the country’s traditionally closedand regulated policy regime to foreign and domestic private investors. From 1986 to 1990 fourloans39 were approved and implemented that financed the creation of new coal-fired thermalpower generation capacity. With these projects, ADB hoped to assist in addressinginfrastructure bottlenecks, and in particular industrial power shortages that resulted from thelack of the energy infrastructure’s capacity expansion in the country.

125. During 1990–1995, ADB provided both financial and technical assistance to boostgeneration efficiency and reduce transmission and distribution losses. This assistancesupported increasing capacity where it would help remove crucial bottlenecks to industrialdevelopment and, where there was good opportunity, to simultaneously raise system efficiency.The initial emphasis was on the state electricity boards, state generating companies, and otherstate or central government entities that demonstrated commitment to reforms aimed atinstitutional and operational improvement, efficiency enhancement, and financial soundness. Inaddition to ensuring that projects included measures to mitigate adverse environmental sideeffects, ADB provided technical assistance to address the problems of pollution arising frompower generation. At the sector level, ADB encouraged reforms leading to improved powersupply, better operational efficiency, and greater resource mobilization with a major emphasison tariff reform. ADB arranged cofinancing from other external sources, including commercialfinancing under the Complementary Financing Scheme, and contributed to the developmentand utilization of natural gas and nonconventional energy sources.

39These included North Madras Thermal Power (Loan 0798-IND), Unchahar Thermal Power Extension (Loan 0907-IND), Rayalseema Thermal Power (Loan 0988-IND) and Second North Madras Thermal Power (Loan 1029-IND).



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126. During 1996–1999, ADB approved only two loans for the energy sector, one forrenewable energy development and the other for an LPG pipeline. In recognition of the need formore focused assistance at the state electricity board level, ADB extended TA grants thatassisted states to develop plans for restructuring.

127. After 1999, ADB assistance supported India’s Tenth Plan. ADB increasingly focused itsassistance on restructuring the state power sector to promote operational and commercialimprovements of the state electricity boards, including to rationalize power tariffs. In addition toits direct support, ADB leveraged its national-level support and private investments to supportstates that had financially sound state electricity boards. It encouraged adopting substantivereforms to turn the state electricity boards around. The rationale for ADB’s state-focusedprograms was to (i) broaden and deepen economic and administrative reforms that had laggedbehind in areas under state governments’ domains, (ii) accelerate power sector infrastructuredevelopment and restructuring, (iii) maximize synergy and the multiplier effect of ADB’seconomic and sector policy dialogue and project interventions within a region, and (iv) improvethe efficiency and manageability of ADB’s operations.

128. In the private sector, TA projects supported the gas segment by (i) establishing aregulatory framework, and (ii) introducing international technical and management expertise.

2. Sector Positioning

129. ADB’s overall operational strategy for India supports efforts to achieve more sustainableeconomic growth in order to promote employment and reduce poverty. ADB’s initial contributionto higher growth was primarily aimed at improving supply-side efficiency of the economy,especially by reducing bottlenecks in key infrastructure sectors. This included an emphasis onimproving the policy, institutional, and regulatory framework so as to enhance the efficiency ofpublic sector operations and to encourage private investment. The energy sector, primarily thepower sector, was a priority area for ADB assistance.

130. ADB, along with other development partners, in particular the World Bank, has been incontinuous dialogue with governments at the central and to a lesser extent state levels overpower sector reform. In the last few years, that dialogue has clearly led to major improvementsin sector policy and essential reforms. The importance of power to economic development isaccepted throughout the governments and ADB programs have focused on projects that werewell thought through and that generally have been delivered within budget. TA projects, with twoexceptions, have contributed strongly to sector reform and performance improvement.

131. Until 1995, operations of ADB and other development partners in the power sector inIndia had been generally successful from a project point of view. That is to say that the projectshad been completed, albeit with implementation delays, and performed to the expected

technical levels. Although operations of the project components, taken individually, have beensatisfactory, the overall sector performance, in terms of delivering a high quality and reliablepower supply, continued to deteriorate as the overall strategy did not address the fundamentalstructural weaknesses of the power system and spread ADB’s resources too thinly.

132. By the mid-1990s, the Government recognized the urgent need for structural reform atthe state and central levels. In recognition of this fact and of the need to focus its assistancemore effectively, ADB revised its strategy for India in 1996 to provide a portion of its assistancein a systematic and comprehensive manner at the state level. This reflected the facts that (i) a



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geographic focus, together with the ongoing selective sector focus, enabled ADB to maximizeits development impact both in the states concerned and, through the demonstration impact ofits operations, in other states as well; (ii) state-level economic reforms, which had been laggingbehind initiatives taken by the Government, needed support and incentives; and (iii) the stateshave considerable autonomy and have major legislative, administrative, and fiscalresponsibilities in many economic and social sectors, including the power sector.

133. The shift in ADB lending policy could not have been made earlier for a number ofreasons:

(i) The central and state governments had not been ready to take the necessarypolitical steps.

(ii) There had been no consensus among concerned agencies on what shouldconstitute reforms until adoption of the Common Minimum National Action Plan,

(iii) The necessary legislation and financial incentive mechanisms were not in place.(iv) The state electricity boards’ financial burden on state governments’ budgets and

the resulting shortage of funds for other development needs did not come to acrisis point until the severe shortage of capacity became evident.

134. Since 2000, ADB has primarily focused on the following:(i) Program support to states committed to reforming and restructuring the power

sector in order to achieve holistic change in macroeconomic management. ADBis assisting the reform process by limiting assistance to those states that havedemonstrated the political will to substantially reform their public sectoroperations. It assists them to operationalize these reforms. Assam, Gujarat, andMadhya Pradesh were initially identified as potential states for assistance, asthey met ADB’s lending criteria.

(ii) Project support to include strengthening system expansion and promotingcommercial operations using sector and investment loans. At the national level,projects supporting the development of interstate transmission systems havebeen fundamental to ADB’s overall energy sector program. ADB’s intervention in

the transmission subsector has improved commercialization and overalloperating efficiencies.

(iii) Other assistance to support the development of renewable energy and energyefficiency initiatives.

3. Contribution to Development Results

135. The thematic aims of the loans and TA reviewed as part of the SAPE follow ADB’senergy policy initiatives, and the assistance evaluated is considered to support the thrust of thatpolicy.

a. Poverty reduction

136. The loans reviewed for the study had limited direct intervention regarding poverty.Rather, the effects are likely to be indirect, mainly through improved financial performance of thepower sector, additional and more reliable supply to rural areas, and greater transparency andconsumer involvement. In Gujarat State, villages were connected with 24-hour access to powerthrough a redistribution of power that reallocated agricultural connections to off-peak periods.40 In Assam State, 78,000 new rural consumers were connected. ADB has recently targeted

40Subsequently, the quality of power to both sectors improved.



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program and project assistance to states with high poverty levels, and the Government forwardsthe proceeds of ADB loans on a 90% grant basis. This suggests that the proposed macro focuson poverty, as opposed to directly targeted intervention, is being realized. Given the relativeshort time since these loans were approved, it is too early to evaluate poverty impacts.

137. Poverty is largely being addressed through sector restructuring and introducing better

sector governance and commercial management principles. In addition, ADB has encouragedthe use of subsidized lifeline tariffs for the poor, discouraged indiscriminate subsidies, supportedleast-cost generation through international competitive bidding, promoted balanced sectordevelopment, and helped reduce technical and nontechnical losses.

138. A major concern regarding rural electrification projects is that there is a danger ofmaking poor people poorer. This may occur when the rural population pays for the connectioncharges and the related internal wiring of their houses, usually on a monthly basis, and invest inhousehold appliances that run on electricity. However, they still have to buy the kerosene,batteries, and wood fuels for cooking when electricity is not provided at times when it is mostneeded, particularly during the evening peak periods. There is a need to ensure that there aresufficient supplies to meet the projected increased demand.

b. Promoting Private Sector Participation

139. The major thrust of ADB funding has been to promote sustainable commercial andfinancial operations with improved governance in the electricity sector where the recipients haveshown a commitment to these reforms. The impacts of this thrust are significant, likely to besustained, and have led to demonstrable and replicable projects. Public sector operations in thegas sector contributed to strengthening the framework for the private sector to enter the industry.ADB’s private sector operations have been material both in terms of helping catalyze industryreforms and public sector lending and through direct investment that helped reduce financiers’concerns about project risks. Cooperation between ADB’s public sector and private sectoroperations has facilitated private sector investments in the energy sector. Successful ADB-

supported reforms are starting to create conditions for private sector investment and possiblyincreased Private Sector Operations Department deals in the power sector.

c. Regional and Global Environmental Impacts

140. ADB assistance under this strategy has had mixed outcomes. While the IREDArenewable energy project and energy efficiency projects at BEE have led to demonstrable andreplicable projects, the outcomes of the other projects were only partly successful. The lack ofsuccess can be attributed to procedural issues and suggests the modalities used may need tobe reviewed before lending further to this area. ADB’s assistance for energy efficiency for mostof the evaluation period mainly focused on policy dialogue and capacity development. Its levelof investment in energy efficiency was far below both the potential and the need. Low energy

prices, which prevailed during the early part of the evaluation period, and weaknesses in thepolicy, legal, and regulatory frameworks, did not provide the incentives for firms, households, orgovernments to invest in these areas. A similar conclusion applies to ADB efforts to supportrenewable energy, reduce greenhouse gas emissions from the energy sector, and, morebroadly, to address global warming and other environmental issues in the energy sector.

141. ADB has developed new modalities to better position itself to promote energy efficiency,renewable energy, CDM, and the development of cleaner technologies to help address the



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energy-environment nexus. These are new initiatives, so it will be several years beforeevaluation evidence is available to determine how successful these initiates will be.

d. Regional Cooperation

142. Development of a regional power grid and enhanced regional power sector cooperation

has long been discussed through the South Asia Association for Regional Cooperation. Thelimited level of cooperation achieved to date reflects political tensions between countries in theregion. There is significant potential and need for enhancements in this area.

4. Overall Assessment

143. ADB’s approach to state electricity board reform has been to wait for clear signs of state-level commitment before providing support and then to provide a mix of program, project, andTA support. This approach has worked well, as there has been continuity of commitment fromall three states. Gujarat has graduated from state support and is now largely self-sustaining.Assam and Madhya Pradesh will need longer-term support. In all cases, the states should nowbe able to allocate additional resources to poverty reduction and extending electrification to all

consumers rather than to indiscriminate subsidies and losses through theft. The overall impactof the program is therefore rated “substantial.”

144. ADB assistance can be broadly grouped into two phases: pre- and post-1996. Before1996, ADB was active in generation, transmission, and energy efficiency initiatives, whereas thefocus since 1996 has predominantly been on sector improvement and transmission. The shift instrategy and resulting new focus was complemented by good coordination between assistanceagencies having commonly agreed themes for sector restructuring and efforts to avoidduplication of efforts. For instance, the World Bank funded the regulatory needs of MadhyaPradesh and ADB funded major programs and projects for system expansion that are beingsupported by DFID for the development of their information technology needs. Overlappingassistance was not observed in any ADB project, and this is the result of good coordination

between country assistance agencies. ADB assistance to the renewable and energy efficiencysectors has also been successful, and was consistent with the capacities of the EAs to absorbthe assistance. The shift in ADB policy and lending toward energy efficiency follows a worldwidetrend and matches the policy direction changes in the Indian energy sector.

C. Assessment of ADB Performance

145. ADB fielded regular missions to review projects, and it provided significant additionalitythat contributed to projects’ success. This includes attracting private sector participation inrecent years, developing environmental evaluation capacity, efficient processing of variationsdue to savings, assisting with bid approvals and awards, and advising on technical issues.Furthermore, ADB provided timely and effective TA support that supported institutional

strengthening appropriate to design, operations, and development consistent with the projects.ADB’s India Resident Mission has been praised by EAs and the Ministry of Power for expeditedassistance to convert loan savings into additional funding for system improvements, and theGovernment believes the Resident Mission should be handling more of the day-to-dayadministration to further improve client services.

146. Over time, ADB has responded to the changing needs of the sector. ADB’s recentassistance was in synergy with the development goals outlined in India’s Ninth and Tenthdevelopment plans, and it supported both ADB policy and the development requirements of the



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Government. While the overall power sector has made significant improvements in supply andsector governance, ADB’s assistance at the state level, where it has participated, has beenhighly effective. The combined efforts of ADB and the World Bank, with their common focus onrestructuring, influenced the Government to undertake the major reforms implemented underthe 2003 Electricity Act. Overall, ADB’s performance is rated as “satisfactory.” The overalltop-down rating of 17 (Table 9) indicates that the ADB assistance was “successful” from the

strategic and institutional performance point of view.

Table 9: Top-Down Rating Summary

Rating Scale SAPE RatingCountry Positioning 0–8 6Contribution to Development Goals 0–8 5ADB’s Performance 0–8 6Total 24 17

SAPE = sector assistance program evaluation.Source: Operation Evaluation Mission. Sector assistance program evaluation team.

D. Overall Evaluation

147. The overall rating based on the bottom-up and top-down assessments of ADB’sassistance in the energy sector is “successful.” Further evaluation of this program in, say,5 years’ time might well raise the overall scores when additional information is available aboutimpact and sustainability.

V. CONCLUSIONS, KEY LESSONS, ISSUES AND RECOMMENDATIONS

A. Conclusions

148. With passage of the 2003 Electricity Act, the emphasis in India’s energy sector has beenon increased competition, open access to transmission and distribution networks, merit orderpurchase, power trading, and time-bound restructuring of state electricity boards. That hasestablished an enabling environment for reforms in the sector. ADB loans and TA have beenwithin the guidelines of ADB’s energy policy, targeted those sectors outlined in the countrystrategies and programs for India, and supported the reforms proposed in the 2003 Act. ADBassistance to the state electricity boards was generally relevant, efficient, and effective. Thiswas a direct result of ADB’s good understanding of the capabilities and desire of the stateelectricity sectors to undergo the changes agreed during the loan processing. Tranche releasesof loans supported by covenants were well supported by the state electricity boards and haveensured that major outcomes were achieved. The depth and length of ADB policy dialogue andclient interaction is evident from the length of time spent in loan preparation and from clientresponses, and it has been instrumental in matching client capabilities and inputs with ADB

assistance. Overall, the outcomes of the project and program loans and supporting TA havebeen successful. With continued support to the state electricity boards, the intended impacts arelikely to be sustained.

B. Main Lessons Identified

149. The main lessons identified from the evaluation are:



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(i) ADB’s approach to lending at state level has worked well and should be used asa model for future assistance,

(ii) sustained technical assistance is needed to support the reform programs at statelevel, and

(iii) corporatization is providing benefits similar to those normally attributed toprivatization.

150. The key feature of the state electricity board assistance programs was patient andthorough preparation that set assistance into a framework of reforming the state’smacroeconomic management. The programs set high initial hurdles for assistance, requiringprogress in a number of reform areas before any funds were committed. This ensured thatADB’s lending went to states where it would have the most impact. It enabled state powersectors to create visible improvements at the same time as the painful aspects of reforms werebeing implemented. ADB should adopt a similar approach in considering any future lending tostate power sectors.

151. Technical assistance has been crucial to the success of state programs, both before andafter loans were made. Such TA will need to be sustained in order to reach reform objectives.

ADB’s coordination with bilateral development partners was also instrumental in developingappropriate and timely support for the reform process.

152. ADB’s experience has shown that full privatization of public utilities is not necessarily theonly option. Corporatization with government ownership can also deliver good results ifcommercially and financially sustainable principles are introduced to improve efficiency anddeliver better services to customers. ADB assistance has increased the quality of governanceacross the energy sector resulting in more efficient management, better use of financialresources, and reduced opportunity for corruption. Reducing opportunities for corruption byaddressing two of its main causes—electricity shortages and a lack of good governance—should be a continuing major initiative.

C. Assessment of the Main Issues Facing the Power Sector

153. The main issues facing the power sector are:(i) maintaining the pace of reforms,(ii) improving governance,(iii) increasing energy security, and(iv) minimizing the environmental impacts of the energy sector.

1. Maintaining the pace of reforms

154. The overall environment in the power sector is one in which positive change is beingaccomplished. While restructuring is progressing, energy shortfalls persist and impede

economic development and poverty reduction. The all-India average shortages during FY2004– 2005 were 8.3% in terms of energy and 12.8% in terms of peak load. There are considerableregional, local, urban-rural, and seasonal variations in the power deficits. These figures havechanged very little over the past 5 years and indicate that additional capacity being introducedinto the system is only matching demand increases. Massive investment is needed to meet theobjective of power for all by 2012, eliminate load shedding, and improve the quality of power.This can only be justified if the move to a more commercial approach in the power sector issustained.



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155. Reforms are unevenly progressing across states and may be threatened by increasedcompetition. There already are signs that some states, such as Gujarat, are moving ahead veryquickly with reform while others are lagging. Within a few years, the faster reformers may enjoylower tariffs, better quality supply, and greater success in achieving 100% rural electrification. Atthe same time, the extension of open access may reduce even further the viability of slowreforming state electricity boards. In Assam, for example, 1% of consumers account for 40–50%

of the sector’s revenue, and this revenue would be at risk in a contestable market.

2. Improving Governance

156. The following governance issues arose in some or all of the three states to which ADBhas already provided lending assistance and are likely to arise in others:

(i) There are still some shortcomings in political independence.(ii) Distribution companies are not autonomous in setting tariffs or procuring power.(iii) The finances of distribution companies are not separated from one another.(iv) Human resources are shared between distribution companies.(v) Risk management is notably absent.

157. Creating properly structured boards is a precondition for success in the long term. Fewof the new distribution companies have autonomous and well-structured boards. There isextensive cross-membership on boards, with the same senior civil servants often sitting on theboards of several of the newly created companies. Other nonexecutive directors often lackpower sector or commercial experience. There is often only one executive director (themanaging director) and the boards lack executive capabilities in finance and other specialistareas. Sometimes senior positions are occupied by bureaucrats on secondment fromgovernment. In other cases, senior staff from the former state electricity board hold positions inmore than one company and positions are held on acting rather than permanent bases. The roleof the former state electricity board is often unclear, and it seems to act as a holding companyeven in cases where it does not have such a relationship with the new companies.

158. Many state governments are unwilling to permit different distribution companies to adoptdifferent tariffs. This practice is impeding the development of independent distributors. Stateelectricity boards are retaining the role of single buyer for the state and, by extension, the role ofsystem planner. The distribution companies do not have to negotiate power purchase contractswith generators or to plan for sufficient supplies to meet their needs. In many cases, thefinances of the distribution companies are not independent. The former state electricity boardcontinues to act as a central treasury and to negotiate loans with banks on behalf of thedistribution companies. In some cases, it is uncertain how viable the individual distributioncompanies will be if they will be fully separated. Open access will eventually enable largercustomers to shop around for power supplies and the better run utilities will be better able toattract these profitable customers

159. Risk management in the trading of electricity has been noticeably absent at the stateelectricity boards. Electricity is one of the most volatile products traded in any market, andtrading involves considerable risks. These include, for instance, financial, operational, andcounterparty risks at the corporate level and prudential and regulatory risks at the market level.Most electricity trading organizations in developed nations recognize these risks and havedeveloped suitable risk management policies and procedures to mitigate and limit theirexposure. This requires a considerable investment in time and training, the development of newstaff skills to support these functions, new software, and organizational changes. It also requiresconsiderable capital investments for computer systems. Human resources are shared across



40

distribution companies in such areas as finance, legal, information technology, and otherspecialist areas. While it may be difficult to achieve a full staffing complement in these areas,the firms need to meet their skills requirements internally in order to perform autonomously.

160. The market design in India leaves the restructured state electricity boards exposed to fullvolatility for at least some of their (uncontracted) loads, and these costs can be passed on to

consumers through the electricity regulatory commissions. Collective trading through the holdingcompanies still reallocates the risks between the distribution companies, thus circumventing theneed to shift the risk away from consumers.

161. Training and the cost of training are major issues. The design and implementation of therestructuring failed to take into account risk management, its staff support functions, and itsimplementation. It also was absent from the proposed franchising system proposed to take overmuch of the retail role. Where ADB takes a role in the development of an electricity market, itcan be instrumental in assuring that sectors of the industry are not marginalized, as was forinstance the case in the Philippines electricity cooperatives.

3. Increasing Energy Security

162. India needs to rapidly implement measures to increase and secure its fuel supplies.Appendix 10 gives a summary of the issues surrounding the current fuel constraints. Thecurrent measures include the following to alleviate fuel shortages:

(i) rationing fuel,(ii) securing additional coal supplies through imports, and(iii) diversifying fuel sources.

163. The Government’s response to the fuel supply constraints has been to ration fuel,diverting additional supplies of coal to the power sector and gas supplies away from the powersector. As coal is also a primary fuel source in the cement and steel industries, the existing andcontinuing constraints on gas and coal supplies impede economic growth. There appear to be

large-scale inefficiencies in the coal industry, in particular, which are attributable to governance,outdated operational methods, a lack of regulation, and slow allocation of leases. Furthermore,rail transportation is hampered by poor loading and unloading facilities at the mines and powerplants. It may be possible to replicate some of the reforms in the power sector and to achievesimilar gains in the fuel supply sector. The SAPE observes that, while the distribution,transmission, and generation sectors have made rapid progress, without a secure and reliablesupply of fuel generation companies will not be able to meet their financing needs as the risk willbe perceived as too high. The World Bank has previously withdrawn its assistance to this sector,following successive failures to promote structural changes. With the impending fuel supplyconstraints and the sector’s poor financial and operating performance, however, there may nowbe sufficient impetus to assist the sector toward a more rational structure.

164. Other measures to increase fuel security will be to develop the additional infrastructureto import coal. Coal handling facilities for importing coal in the medium term (to 2012) areinadequate. Existing ports are not capable of handling the large additional import tonnagerequired, and new infrastructure will be needed to meet the planned Ultra Mega Power Projectson the Western seaboard.



41

4. Reducing the Environmental Impacts of the Energy Sector

165. Enhancing energy efficiency on the supply side is the most critical challenge, as thepower sector contributes large shares of the CO2 and SO2 emitted in the country. In addition, inorder to bridge the gap between demand and supply, and especially in the context of the limitedfinancial resources available, it has become imperative to look for optimum utilization of existing

installed capacity by maximizing the generation through renovation and modernization (R&M) ofexisting power plants. The Central Electricity Authority has identified 106 thermal plants forextending their economical lives by an additional 10 to 15 years, and it has plans to modernizeanother 57 plants. These programs require changed practices for operations and maintenanceand to ensure that sufficient revenues are set aside for this. PFC is mandated to organize theR&M initiative, which also will be applicable for CDM and non-CDM carbon trading.

166. Although the Indian Government has established its Integrated Energy Policy and settargets, there are significant barriers to mainstreaming the R&M initiative. These include theperceived advantages of capital investment in business-as-usual technology; the highertransaction costs of preparing smaller projects; weak coordination and regulatory mechanisms;and a lack of institutional capacities, particularly in the state governments. The following

institutional barriers have been identified:(i) low energy prices,(ii) scarcity and high cost of energy efficient products and services,(iii) limited local human resource skills to implement demand-side management,(iv) lack of commitment to demand-side management programs, and(v) governments’ reluctance to entrust the utilities with implementing demand-side

management programs.

VI. STRATEGIC IMPLICATIONS FOR INDIA’S POWER SECTOR

167. India has to manage three conflicting goals in its energy sector: attaining security of fueland energy supplies, increasing the efficiency of supply and financial operations, and minimizing

the environmental effects of the increased supplies. India’s continuing shortage of energysupplies, both of fuels and generation capacity, threaten its economic and social developmentgoals. The energy sector’s viability needs to be strengthened through improved governance andoperational efficiency. There is also a need to minimize the environmental impacts of theincreased generation needed to meet the growing energy demand. These conflicts areillustrated in Figure 5 below.



42

The energy sector: tradeThe energy sector: trade--offs betweenoffs between

three important but potentially conflicting goalsthree important but potentially conflicting goals

Electricity

Sector

EnvironmentEnvironment

SecuritySecurity EfficiencyEfficiency

Market stability

and robustnessCompetition

Geopolitical

instabilityMonopolyregulation

Nature

Conservation

Climate

Change

Air

pollution

168. The weakest links in attaining these goals are at the state level, where there aremajor deficiencies in operational and technical efficiencies and continuing financial losses. Asthis sector provides the primary revenues for system expansion, restructuring the stateelectricity sector to be self-sustaining should be the highest priority for assistance. In parallel,general electricity system expansion and in transmission and in generation should be addressedto balance supply and demand, as their viability will be assured with reliable revenues from therestructured state sector. Concurrently, environmental concerns must be integrated through (i)state system upgrades that reduce losses from the overloaded systems, (ii) rehabilitation of

existing older generation plant, (iii) greater emphasis on energy efficiency, and (iv) a strategicenvironmental focus on the development of the system. Supporting these efforts, there shouldbe a continued emphasis to improve the operational efficiency of the state electricity sectorthrough improved governance and the development of independent regulation.

A. State-Level Distribution and Transmission Sector Reforms

1. Expanding Reforms to Other States

169. ADB’s performance as lead donor for the power sectors in Assam, Gujarat, and MadhyaPradesh has been successful. System performance has improved, losses have been reduced,governance has improved, and there is a clear financial turnaround in each of the three states.

In each case, the study finds that ADB should continue to be involved. Power sector reform inAssam and Madhya Pradesh continues to be a work in progress, and continuity of support fromADB is vital to ensuring the sustainability of reform efforts. The ultimate success of programswill depend on achieving success with distribution companies. Even in a progressive state suchas Gujarat there is still considerable scope for improving performance through reducingtechnical and nontechnical losses and better collecting amounts billed. The potential forimprovement is significantly greater in Madhya Pradesh and Assam. ADB should stay engagedwith the retail sector and continue working with utilities to promote improving performance.

Figure 5: Conflicts in the Energy Sector

Source: Adapted from 2005 NorskHydro Presentation..



43

170. Based on this experience, ADB should be willing to take on another state as a client andwith ADB as the lead development partner. However, the hurdles should be high in the sameway as they were in the three states supported so far. The state should need to show a clearreform commitment before lending begins, a program loan should be divided into tranches, anda project loan and TA should again be adopted. There should be reform covenants to be metbefore lending begins and as a condition for tranches, as with the existing loans.

2. Promoting Operational and Financial Efficiencies in the Energy Sector

171. ADB should increase its efforts to promote better governance through (i) better designedcovenants, (ii) the inclusion of risk management, and (iii) continued support for independentregulation.

172. The challenges surrounding energy sector governance are enormous. The impacts oninvestment, financial stability, competitiveness, and economic development are great. Theirimpacts on the poor can be overwhelming, as inefficiencies force the poor to absorb theinequitable costs of power. Cost recovery, for example, is one of the biggest issues facingIndia’s energy sector. In many states, consumer revenues do not cover even the cost of energy

supply and the environmental costs associated with energy generation and distribution. Thissituation may simply be unattractive for private sector investors due to the associated high costsof demands from all kinds of concessions and the high costs associated with risks mitigation.

a. ADB Covenants Should be Realistically Designed.

173. A realistic long-term objective for ADB would be to raise accounting and auditingstandards in the state utilities to the same level as those at the central government. Thetransition from statutory state electricity boards to companies established under the CompaniesAct provides a good basis for doing this. The new companies will have the freedom to set theirown accounting policies and processes and may be able to have commercial auditors. Boththese developments would be positive. In the short term, however, restructuring is creating

greater problems. The establishment of new companies necessitates the splitting of accounts offormer state electricity boards between several new entities. This, in turn, demands a cleanup ofthe accounts that is frequently time-consuming. It delays completion and internal approval ofaccounts and may give rise to numerous audit queries that lead to further delays. The processis beneficial, despite the delays, because it leads to more accurate accounts. However, thedelays can lead to noncompliance with ADB covenants and hence the suspension of lending.This is counterproductive. A better approach would be to have a set of financial conditions,covering a number of years, which would lead to improvements in both accounting and auditingstandards through the cleaning up of accounts and appointment of commercial auditors. ADBshould be prepared to accept some delays in the submission of accounts provided thatappropriate steps are being taken to upgrade standards.

174. It is also understandable for ADB to set covenants regarding accounts receivable so thatdistribution companies reduce outstanding debts of customers to commercial levels. Typically,this might be around 2 months’ billings. At many state electricity boards, however, receivablesare far higher than this and include debt for which there is negligible hope of recovery. The keyissue here is the method by which, and the time over which, reductions should be achieved.State electricity boards can make immediate cosmetic improvements simply by increasingprovisions, but this will not improve real financial performance. Moreover, because of pooraccounting and political unwillingness, there are often difficulties in deciding what should bewritten off and in sanctioning the write-off. A sensible plan is likely to include steps to verify all



44

outstanding debts, write off those that are clearly irrecoverable, disconnect delinquentconsumers and ensure that consumers remain up-to-date with payments based on current bills.Requiring state electricity boards to reduce receivables to low levels in the short term is unlikelyto be productive as this is a two to three year process. It is better to ensure that a plan is put inplace along the lines discussed above and, if a short-term performance indicator is required, tofocus on the level of collections compared to current billings.

b. ADB Should Ensure that Risk Management, as a Component ofGood Governance, is an Integral Part of an Overall Plan for MarketLiberalization.

175. In emerging markets, risk management is an essential requirement for the long-termsurvival of all participants. Risk management needs to develop simultaneously with a marketstructure, and it will require significant funding to implement the knowledge and systems needed.This is particularly the case where a market has many small participants, such as that proposedby the franchising arrangements being implemented in India.41

176. Future lending may shift toward nonsovereign lending. Hence, additional financial risks,

along with potential performance-based risks imposed by regulators, will become concerns forrestructured state electricity boards. General corporate risk management, including arequirement that there be a risk management committee reporting directly to an independentboard, should be included in lending covenants. In addition, staff capacity in finance andaccounting need to be developed in the electricity sector to support the governance and timelymanagement decisions required to run a modern utility.

c. ADB Should Continue Support for Independent Regulation.

177. Power sector regulation in India, both through the CERC and state electricity regulatorycommissions, is playing a crucial role in promoting reform and the enforcement of both theunderlying principles and the details of such legislation as the 2003 Electricity Act. It is the state

regulators who are taking the lead in reducing political interference in state utilities and ensuringa proper balance between the interests of consumers and commercial good practice. The OEMwas impressed by the skill, commitment, and enthusiasm with which regulators and their staffsare pursuing their new roles and how they are convinced that their role is crucial to betterperformance and commercial autonomy for the sector. In particular, all the regulators have donea good job in establishing transparency through websites and other public informationmechanisms.

178. Regulation is a relatively new activity, both in India and internationally. Indian regulatorsare already learning from one another and from foreign experience. Numerous issues wereraised in discussions with regulators, such as the need to ensure financially competitive salaries,the scope for creating career structures for regulatory staff, meeting training needs, methods of

achieving financial independence, and means of sharing information about best practices. Thereis no doubt that dialogue between power sector regulators has been a powerful tool in sharingand promoting best practices. Where there are opportunities for ADB to promote cooperationand skills development, these should be taken advantage of.

41In the Philippines, where little or no risk management is practiced, the costs of transactions and the requirementsfor risk management may be beyond the financial capabilities of the participants. As a result, there is a very highlevel of payment defaults for power among the smaller cooperatives.



45

179. There is also further scope to improve the regulatory environment in the fuel supplysector (Appendix 10) and to enhance the regulatory capacity of the CERC. A model such as theCentral Asia Regional Economic Cooperation Members Electricity Regulators Forum andinternational mentoring are some possible options that warrant further discussion.

B. Funding System Expansion

180. Transmission capacity needs to be expanded from the current level of 9,500 MW to30,000 MW by 2012 and will require approximately $15.8 billion of capital investments to reachthis target. The financial status of the transmission sector and its potential capability to attractnonsovereign lending suggests that future funding for this sector may largely be providedthrough a combination of public and private sector finance.

181. The development of new thermal generation capacity should be a lower priority forADB’s public sector operations, especially at the state level. Central generators generally havea better record of constructing and operating successfully. ADB’s involvement in the Unchaharproject illustrates this point in that the project’s success wholly depended on the takeover byNTPC. PFC is well funded, is deeply involved in generation, and may be better placed to assist

states. Power Grid is a long-standing ADB client which can now raise funds on the open market.However, the company values the continuing link to ADB. The connection also gives ADB aclear opportunity to offer its views on reform issues at the centre of the power sector and helpsin sustaining policy dialogue with the Government on the overall direction of reform. Suchrelationships may prove invaluable in view of the many uncertainties that lie ahead as reformproceeds.

182. ADB may also consider support for hydropower and other renewable energy sources.The development of hydropower has lagged in recent years. The Government’s plans envisagedeveloping a further 50,000 MW of hydropower capacity over next few years. Hydropowerprojects are often difficult to finance because of long payback periods, and ADB’s ability to offerlong-term loans can therefore be especially helpful to promoting such projects. ADB may also

be able to offer more complex financing support by, for example, offering loans during theconstruction phase of hydropower projects that can then be refinanced from other, commercialsources once the project is operational. The funding released can then be devoted to theconstruction stage of further hydropower projects. However, future ADB involvement in projectswith dams will be controversial. 42 ADB will need to make special efforts to apply its safeguardpolicies during project preparation, implementation, and operations. ADB will need to find amore constructive way to work with nongovernment organizations and affected people to ensurethat the hydropower projects that it funds do not harm people and the environment.

1. ADB Should Increase its Role to Promote Interregional Cooperation as anAdditional Source of System Expansion.

183. With the development of a national grid within India, which is scheduled by 2012, andthe rapid growth in power demand, the potential benefits of regional cooperation are greatlyenhanced. The most obvious example is the unrealized hydroelectric potential in Bhutan(estimated at 21,000 MW) and Nepal (estimated at 83,000 MW). Pakistan has 36,000 MW of

42Arturo Nuera. 2005. The Asian Development Bank and Dams. Philippines: NGO Forum on ADB; GreenpeaceInternational and European Renewable Energy Council. 2007.The Report of the World Commission on Dams.London.. Energy [R]Evolution: A Sustainable World Energy Outlook. The Netherlands: Greenpeace and EREC.Greenpeace, for example, criticizes ADB for supporting large hydroelectric power plants and promotes smaller“run-of-the-river” hydropower that is said to be more environmentally friendly.



46

unrealized hydropower capacity. Bangladesh has considerable gas reserves it uses for powergeneration and that could be used more effectively if complemented by hydropower resources.Cooperation with all these neighbors could help to manage system stability, maintenance, andpeaks more effectively across the region.

184. Development partners such as ADB can provide the impetus to move such regional

projects forward, both financially and politically. In addition to acting as a source of finance, ADBis widely recognized as an honest broker that could help to overcome some of the difficultissues in negotiations between countries and provide momentum in achieving an agreement.The commercial case for regional linkages is compelling, and in promoting regional cooperationADB should aim to involve the private sector as well as public utilities.

2. Increase The Number And Volume of Nonsovereign Transactions To FundSystem Expansion

185. The Government’s shift toward viability gap funding, along with general progress onunbundling the power sectors and putting in place independent regulators, suggests thatcircumstances are starting to improve for private sector activities in India. This change has been

reflected in the scale of PSOD’s operations, as approvals started to accelerate after 2003. Thestudy concluded that both the generation and transmission sectors in India are capable ofundertaking nonsovereign lending to support their expansion needs. It is appropriate thatnonsovereign lending can take on a larger role to fund this sector and to catalyze private sectorfunds, particularly into the transmission and generation sectors as new areas for public-privatepartnerships. PSOD is uniquely situated to coordinate with ADB’s public sector operations, andit has the expertise needed to develop the transition of the generation and transmission sectorsinto private sector-like operations. Current PSOD limitations on funding ceilings and staffingneeds may be the primary inhibiting factors, and perhaps these should be addressed as amatter of urgency.

C. Integrating Energy Efficiency and Renewable Energy to Improve the Environment

186. There is great potential to integrate energy efficiency and renewable energy initiativesinto ADB-funded projects. In India’s case, in particular, there is great potential and interest toconduct more follow-on projects for developing cleaner technologies and energy efficientprojects. The BEE sees this as a responsibility of the states, and it is providing policy support.However, state governments have no technical expertise and lack adequate fundingmechanisms. Future assistance of this nature may best be served by smaller loansaccompanied by significant partial credit guarantees. Policy interventions will also be required toaddress awareness, access to capital, and savings uncertainties.

187. Current energy efficiency initiatives do not as yet have the desired impact. Demand-sideelectrical and thermal energy efficiency projects are undertaken to improve end-use energy

consumption, manage energy, or adopt efficient technologies or processes. There is also alarge underdeveloped capacity in renewable energy, estimated to be around 81,000 MW. 43 ADB’s Asia Least-Cost Greenhouse Gas Abatement Strategy (ALGAS) project assessed thepotentials of energy efficiency improvements in some of the energy intensive subsectors andconcluded that energy savings from 30% to 50% are technically feasible in many industries. Theenergy efficiency potentials within reach of the agriculture, industry, buildings, transportation,and electricity sectors could provide a major boost to developing member countries’ economies.

43Ministry of Nonconventional Energy Sources. India Website.



47

188. There are many state and central governments generating plants that requirerehabilitation, and this should generally be a higher priority than new construction as it shouldbe more cost-effective. Financing of such rehabilitation may be more risky because of thedifficulty of obtaining warranties on equipment for rehabilitation. There may, therefore, be someworthwhile opportunities for ADB involvement in lending to these plants, both public and private.

189. Use of TOU tariffs should also be encouraged, as these enhance supply-side efficiencyby reducing the need for investment in additional peaking plants as load is shifted from peak tooff peak. The load shift also releases capacity in transmission and distribution. TOU wholesalepricing (supply-side TOU) encourages the development of plant to serve peaking loads. Theevaluation findings indicate that market-based signals in the form of TOU tariffs can be apowerful incentive to encourage energy efficiency initiatives. Tariffs can be used to encouragethe customers of electricity utilities to change their behavior in ways that result in energyconservation, less capital investment, and fewer emissions from the sector.

190. ADB should complement these initiatives to improve the policy, legal, and regulatoryframework and the use of market-based incentives to improve the enabling framework for

energy efficiency, renewable energy, and ways to address environmental concerns in theenergy sector. Where possible, energy sector roadmaps should be the basis for (i) incorporatingenvironmental costs and benefits into the economic analysis undertaken for energy projects,and (ii) undertaking strategic environmental assessments for the energy sector.

D. ADB Should Tailor its Products and Services to Client Needs.

191. ADB should continue to reduce and simplify its conditions for stronger borrowerswherever possible and delegate responsibilities to the India Resident Mission where this canspeed decision taking. For Power Grid, in particular, the OEM could see little need to imposeany other than financial covenants on lending, as the company is commercially run and viable.ADB should also consider embarking on a publicity campaign to correct misperceptions and to

assess the viability of changes to address outstanding concerns.

192. ADB staff dealing with the energy sector must have a broad range of skills to deal withthe wide-ranging requirements of the energy sector. The continued sustainability of ADB’soperations in the energy sector will depend on successfully matching the staff skills mix withclient expectations. A survey of energy specialists conducted by the Regional and SustainableDevelopment Department found that the self-ratings of competencies indicate that energy staffhave a moderate to high level of expertise in the traditional supply technologies. 44 However,skills in areas such as procurement, corporate governance, renewable energy, and financialmanagement were more limited. Going forward, operations will require more staff with expertisein procurement, governance, and financial management in the energy sector. This may requiresome changes to ADB’s staffing skills mix.

44ADB. 2007. Special Evaluation Study on Energy Policy 2000 Review: Energy Efficiency for a Better Future . Manila.



48

VII. RECOMMENDATIONS: FUTURE ASSISTANCE PRIORITIES

A. Recommendations

193. Based on the evaluation findings, the following recommendations are put forward forconsideration in future ADB assistance to the energy sector in India. They are designed to

provide broad guidance but not to be overly prescriptive.

Recommendations DepartmentResponsible

Implementation

1. Subject to the Government’s agreement, continueand expand the current focus on state electricitysector restructuring and system expansion tobalance supply and demand.

SARD As part of the IndiaCPS and itsimplementation

2. Integrate into, and increase energy efficiency andrenewable energy initiatives in, lending programsat both central and state levels.

SARD, RSDD As part of the IndiaCPS and itsimplementation

3. Tailor products and services to meet clients’evolving needs.

SARD, RSDD,PSOD, INRM


4. Increase the number and volume of nonsovereigntransactions to expand generation andtransmission.

SARD, PSOD,INRM


CPS = country partnership strategy, INRM = India Resident Mission, PSOD = Private Sector Operations Department,RSDD = Regional and Sustainable Development Department, SARD = South Asia Regional Department.



Appendix 1 49

LOANS AND TECHNICAL ASSISTANCE GRANTS TO INDIA’S ENERGY SECTOR

Table A1.1: Public Sector Loans to India’s Energy Sector

LoanNumber

Project NameAmount$million

DateApproved

Conventional Energy Generation (other than hydropower)0798 North Madras Thermal Power 150 18 Nov 19860907 Unchachar Thermal Power Extension 160 29 Sep 19880988 Rayalaseema Thermal Power 230 21 Nov 19891029 Second North Madras Thermal Power 200 30 Aug 1990

Subtotal 740

Hydrocarbon Program

1117 Gandhar Field Development 267 14 Nov 19911148 Hydrocarbon Sector Program 250 17 Dec 19911222 Gas Flaring Reduction 300 30 Mar 19931285 Gas Rehabilitation and Expansion 260 7 Dec 1993

Subtotal 1,077

Energy Sector Development

1081 Special Assistance 150 4 Apr 19911212 Energy Conservation and Environment Improvement 147 17 Dec 19921343 Industrial Energy Efficiency 150 13 Dec 19941804 Gujarat Power Sector Development - Project Loan 200 13 Dec 20001869 Madhya Pradesh Power Sector Development Program

(Project)200 6 Dec 2001

1968 State Power Sector Reform 150 12 Dec 20022037 Assam Power Sector Development Program (Project) 100 10 Dec 2003

Subtotal 1,097

Renewable Energy Generation1465 Renewable Energy Development 100 26 Sep 1996

Subtotal 100

Transmission and Distribution

1161 Power Efficiency (Sector) 250 26 Mar 19921405 Power Transmission (Sector) 275 16 Nov 19951591 LPG Pipeline 150 16 Dec 19971764 Power Transmission Improvement (Sector) 250 6 Oct 20001803 Gujarat Power Sector Development (Program Loan) 150 13 Dec 20001868 Madhya Pradesh Power Sector Development Program

(Program)150 6 Dec 2001

2036 Assam Power Sector Development Program (Program) 150 10 Dec 2003

2152 Power Grid Transmission (Sector) 400 21 Dec 2004Subtotal 1,775

TOTAL 4,639




Appendix 150

Table A1.2: Technical Assistance Grants to India’s Energy Sector

TANumber

Project NameType

Amount$’000

DateApproved

Conventional Energy Generation (other than hydropower)

1228 APSEB Operational Improvement Support AD 1,000 21 Nov 1989

1229 National Program for Environmental Management for Coal-FiredPower Generation AD 664 21 Nov 1989

1701 Training Workshop on Environmental Issues Related to ElectricPower Generation

AD 100 25 May 1992

2742 Solicitation of Private Sector Implementation of the ChharaCombined Cycle Power Plant

AD 375 17 Dec 1996

Subtotal 2,139

Hydrocarbon Program

1416 Undertaking a Review of the Hydrocarbon Sector Operations AD 100 8 Nov 1990

1598 Evaluation of Petroleum Exploration and Development RiskContracts

AD 180 14 Nov 1991

1645 Examination of Public Sector Oil Refining, Distribution andMarketing Activities

AD 200 2 Jan 1992

1646 Promotion of Private Sector Investment in DownstreamActivities

AD 400 2 Jan 1992

1837 Natural Gas Rehabilitation and Expansion PP 100 31 Dec 1992

2702 Preparation of Natural Gas Development Master Plan AD 600 9 Dec 1996

2775 Hydrocarbon Exploration and Production Database andArchive System

AD 600 3 Apr 1997

Subtotal 2,180


1119 Power Sector Loan PP 50 6 Feb 1989

1365 Tamil Nadu Electricity Board Operational Improvement AD 740 30 Aug 1990

1366 Environment Monitoring and Pollution Control AD 490 30 Aug 1990

1597 Safety and Environmental Management of ONGC's Activities AD 890 2 Jan 1992

2008 Regulatory Framework for the Gas Industry AD 600 7 Dec 19932474 Environmental Improvement and Sustainable Development of

the Agra-Mathura-Ferozabad Trapezium in Uttar PradeshPP 600 15 Dec 1995

2490 Development of a Framework for Electricity Tariffs in AndraPradesh

AD 300 20 Dec 1995

2738 Preparation of a Power System Master Plan for the State ofGujarat

AD 600 17 Dec 1996

2739 Development of a Framework for Electricity Tariffs in Gujarat AD 300 17 Dec 1996

2740 Review of Electricity Legislation and Regulations in Gujarat AD 235 17 Dec 1996

2741 Financial Management Support to Kheda and RajkotDistribution Centers of the Gujarat Electricity Board

AD 580 17 Dec 1996

2980 Madhya Pradesh Power Sector Development AD 1,000 7 Jan 1998

3305 Support to the Power Finance Corporation AD 1,000 24 Nov 1999

3573 Reorganization Plan for Gujarat Electricity Board AD 600 13 Dec 2000

3574 Consumer Awareness and Participation in Power SectorReforms

AD 50 13 Dec 2000

3575 Support to Gujarat Electricity Regulatory Commission AD 450 13 Dec 2000

3734 Kerala Power Sector Development Program PP 800 4 Oct 2001

3882 Development of a Transfer Scheme for Madhya PradeshPower Sector Reform

AD 400 14 Jun 2002

3883 Legal Support for Madhya Pradesh Power Sector Reform AD 150 14 Jun 2002

3885 Energy Efficiency Enhancement Project PP 600 21 Jun 2002

3953 Assam Power Sector Development Program PP 800 29 Oct 2002



Appendix 1 51

TANumber

Project NameType

Amount$’000

DateApproved

3972 Strengthening Consumer and Stakeholder Communication forMadhya Pradesh Power Sector Reform

AD 150 5 Nov 2002

4083 Building the Capacity of Assam Electricity RegulatoryCommission

AD 500 24 Jan 2003

4182 Urban Clean Fuel PP 995 24 Sep 2003

4241 Reorganization of Assam State Electricity Board AD 1,000 10 Dec 2003

4242 Institutional Development for Rural Electrification AD 400 10 Dec 2003

4243 Policy and Legal Support for Power Sector Reforms AD 100 10 Dec 2003

4380 Uttaranchal Power Sector Development PP 150 23 Aug 2004

4496 Capacity Building for Clean Development Mechanism AD 700 17 Dec 2004

4630 Uttaranchal Power Sector Capacity Building AD 500 11 Aug 2005

Subtotal 15,730

Renewable Energy Generation

1953 Renewable Energy Development PP 354 13 Sep 1993

2648 Institutional Strengthening of Indian Renewable EnergyDevelopment Agency, Ltd.

AD 600 26 Sep 1996

Subtotal


1756 Study of Bulk Power and Transmission Tariffs andTransmission Regulations

AD 600 29 Sep 1992

2116 Power System Planning in Orissa PP 600 28 Jun 1994

2560 LPG Pipeline Project Study PP 100 24 Apr 1996

2752 Liquefied Natural Gas Terminal PP 600 27 Jan 1997

3380 Private Sector Participation in Electricity Transmission AD 600 28 Dec 1999

Subtotal 2,500

TOTAL 23,503

AD = advisory technical assistance, PP = project preparatory technical assistance, TA = technical assistance.Source: Asian Development Bank Database.

Table A1.3: Private Investments and Loans to India’s Energy Sector($million, as of December 2006)

Investment Loan ComplementaryFinancing

Total

Conventional Energy Generation(other than hydropower generation)

9.67 257.00 225.00 491.67

Transmission and Distribution 2.60 79.80 0.00 82.40Total 12.27 336.80 225.00 574.07




52 Appendix 2

SECTOR ASSISTANCE PROGRAM EVALUATION STUDY METHODOLOGY

1. Within the scope and budget of the evaluation it was not possible to examine all of thepower sector interventions and assistance modalities of Asian Development Bank (ADB) in full.The review was therefore focused on a sample of investments and the technical assistancewhich supported those investments. In addition to focusing attention on recent investments, the

sample was chosen to(i) ensure coverage of a broad mixture of projects, taking in generation,

transmission, and distribution;(ii) identify projects which illustrated ADB’s involvement in India’s power sector

reform program; and(iii) exploit existing knowledge in the Operations Evaluation Department (e.g., by

reviewing a private sector investment which was the subject of an earlieroperations evaluation mission to India).

2. The evaluation adopted two main approaches:(i) Interviews with officials in the main agencies in the Indian power sector, both at

the central government and in selected states At the center, this included the

Ministry of Finance, Ministry of Power, Central Electricity Regulatory Commission,National Thermal Power Corporation, National Hydroelectric Power Corporation,Power Grid Corporation, Rural Electrification Corporation, and PTC India Limited(the former Power Trading Corporation). In Assam, it included the Government ofAssam; the Assam State Electricity Board and five successor companiesresponsible for generation, transmission and distribution (three companies); aswell as the Assam Electricity Regulatory Commission and consultants fromSnowy Mountains Engineering Corporation and PricewaterhouseCoopers whowere supporting reform in the power sector under ADB funding. In Gujarat, itincluded Gujarat Urja Vikas Nigram Ltd (the holding company for the state’sinterests in the power sector) and its six subsidiaries (a generation company, atransmission company and four distribution companies) as well as the Gujarat

Electricity Regulatory Commission. In Madhya Pradesh, it included seniorofficials in the state government, the regulator, and the power utilities. Otheragencies included the Indian Renewable Energy Development Agency, Bureauof Energy Efficiency, Energy and Resources Institute and World Bank.

(ii) Analysis of information in reports, including ADB reports (i.e., reports andrecommendations of the President, project completion reports, technicalassistance completion reports, project performance audit reports, back-to-officereports), annual reports, accounts of the utilities, consultants’ reports, and reportsand studies prepared by other development agencies active in the sector.



TABLE A3.1: INDIA’S ENERGY POLICY AND PROGRAM DEVELOPMENT MILE

Year India Energy Policy and Program Development Asian Deve

1910 Indian Electricity Act

Provided the basic framework for electric supply industry. Provided for license for supply of electricity in aspecified area, legal frameworks for laying down of wires and other works. Provisions establishedrelationship between licensee and the consumers.

1948 Electricity (supply) Act

Rationalization of the production and supply of electricity, and generally for taking measures conducive toelectricity sector development. Mandated the creation of state electricity bureaus (SEBs). Expressed theneed for the states to assume role (through SEBs) in expanding electrification across the country.

Industrial Policy Resolution

Envisaged the generation, transmission, and distribution of power almost exclusively in the public sector.

1956

Indian Electricity Rules

Framed under Section 37 of the Indian Electricity Act, 1910 to regulate the supply, transmission,generation, and use of electricity.

1960s The country was divided into 5 regions in order to optimally utilize the dispersed sources of the country for power generation. The division by region was believed to facilitate the planning process and achieveself-sufficiency in power development.

1973–74 Oil price shocks

The Government got involved in a big way in the generation and bulk transmission of power tosupplement the efforts of the states and took upon itself responsibility for setting up large power projectsto develop coal and hydroelectric resources in the effort to meet the country’s power requirements.

Coal Mines Nationalization Act was promulgated.

Setting up of state-owned power corporation

National Thermal Power Corporation

National Hydro-electric Power Corporation

1974–1979

To implement the regional power projects in the North-East, North-Eastern Electric Power Corporationwas set up in 1976.

1986 India joined Asian Development Bank. ADB energy pby the oil pricaugmentation

I. Loan 079

1988 Thermal and Hydro Development Corporation and Nathpa Jhakri Power Corporation set up. Conventional




Unchahar The

1989 National Power Trans Corporation set up to construct, operate, and maintain the interstate and

interregional transmission system.

Conventional

(i) ADBPow

1991 Start of the Energy Reform Process

Conference of Chief Minister and Power Ministers on Power Sector Reform (3 March 1991). TheConference resolved inter alia that commercial viability has to be achieved in distribution in 2–3 yearsthrough any or all of the following: (i) creating profit centers with full accountability; (ii) handing over localdistribution to panchayats, local bodies, franchisees, users association, wherever necessary; (iii)privatization of distribution

Conventional

(i) ADBDev

(ii) ADBProg

To allow liberal capital structuring and allocation of attractive return on investment, 100% foreign equityparticipation was permitted for projects set up by foreign private investors in the sector.

Administrative and legal environment modified to simplify the procedures and clearance of projects.

1995 Orissa was the first to introduce major reforms in the power sector. Orissa Electricity Reform Bill: under

this Act Orissa Generating Company, Orissa Grid Company and Orissa Electricity Regulatory Commissionwere formed.

Haryana Electricity Power Commission constituted.

ADB Second

(i) ADB(Sec

Policy guidelines for private sector participation in the renovation and modernization of power plants wereissued.

Policy for Mega Power Projects (1,000 megawatt capacity) was introduced, allowing supplying power tomore than one state. The Mega projects were to be set up in regions having coal and hydropower potential or in coastal regions.

Liquid fuel policy permitting liquid fuel-based power plants to achieve the quick capacity addition to avertsevere power crisis.

.

1996–1997 Renewable En

Conventional E

(i) ADB(Sec

(ii) ADB

1998 Regulatory Commission Act

The Electricity Law was amended to make transmission a separate activity and invite greater participationfrom public and private sectors. Creation of Central and State Transmission Utility. The Central




Transmission utility was headed by the Power Grid Corporation.

2000 ADB Energy include: a) p

sector involveenvironmentacooperation.

• ADBImp

• ADBSecLoa

2001 Loan 1868-INDevelopment

2002 Sector Reform

I. ADB Loa2003 Electricity Act

- Andhra Pradesh, Delhi, Gujarat, Haryana, Karnataka, Madhya Pradesh, Orissa, Rajasthan, and Uttar Pradesh enacted their state electricity reforms acts, which provide, inter alia, for unbundling andcorporatization of SEBs, as well as setting up of state electricity regulatory commissions.

The Act seeks to create a liberal development framework for the power sector by distancing governmentfrom regulation. Replaced three existing acts, namely, Indian Electricity Act, 1910, the Electricity (Supply)Act, 1948, and the Electricity Regulatory Commissions Act, 1998. The objectives of the Act are “toconsolidate the laws relating to generation, transmission, distribution, trading and use of electricity andgenerally for taking measures conducive to development of electricity industry, promoting competition,protecting interest of consumers and supply of electricity to all areas, rationalization of electricity tariff,ensuring transparent policies regarding subsidies, promotion of efficient and environmentally benignpolicies, constitution of Central Electricity Authority, Regulatory Commissions and establishment of

Appellate Tribunal and for matters connected therewith or incidental thereto.”

- The SEBs of Andhra Pradesh, Delhi, Haryana, Karnataka, Madhya Pradesh, Orissa, UttaranchalRajasthan, and Uttar Pradesh were unbundled and corporatized.

- Distribution was privatized in Orissa and Delhi.

Sector Reform

II. ADB LoaDevelopm

2004 (i) ADB




Transmis

2005 National Electricity Policy

It aims at laying guidelines for accelerated development of the power sector, providing supply of electricity

to all areas, and protecting interests of consumers and other stakeholders while keeping in view theavailability of energy resources, technology available to exploit these resources, economics of generationusing different resources, and energy security issues.

Sector Reform

2006 Tariff Policy

The objectives of this tariff policy are to: (i) ensure availability of electricity to consumers at reasonableand competitive rates; (ii) ensure financial viability of the sector and attract investments; (iii) promotetransparency, consistency, and predictability in regulatory approaches across jurisdictions and minimizeperceptions of regulatory risks; and (iv) promote competition, efficiency in operations, and improvement inquality of supply.

Eighteen state electricity regulatory commissions issued tariff orders.

ADB = Asian Development Bank, IND = India, SEB = state electricity board.



Relevant SectoralIssues

Country National EnergyStrategy

Relevant Elementsof Energy Policy

ADB Energy StrategyAddressed in the

CSP-CAPto energy independence electrification, and capacity

building of power sectorinstitutions aimed to improvemetering and collection of bills,

and to reduce system losses.

ADB = Asian Development Bank, CAP = country assistance plan, CSP = country strategy and program, IND = India, TA = technical assi

Source: Operations Evaluation Department database.



Appendix 4 59

CUSTOMER SURVEY

1. The Operations Evaluation Department commissioned a survey to examine the effects ofthe structural changes in the three states where the Asian Development Bank (ADB) hasextended significant assistance with sector restructuring. The survey extended earliercompleted surveys by Santhakumar (2006)1 which sought to establish the basis of support for,

or rejection of, privatization in the electricity industry and to gauge effects of the changes instates where state electricity boards were being restructured. The study was done over anextended period. Initially 7,000 households in 14 states were interviewed in FY2004–2005. Thesample, around 20% of which was households without electricity connections, was selected byconsidering regional variations in connectivity and urban-rural population. A second householdstudy was conducted in late 2006 in Assam. Furthermore, industry groups in Assam, Gujarat,and Madhya Pradesh were contacted to ascertain their views.

A. Overall Conclusions

2. The opposition to reforms is stronger among the urban households than the rural ones.Although households belonging to socially weaker sections are mainly ignorant of the issues

related to reforms, they are slightly less likely to support privatization compared to the generalpopulation. The outcomes of the analysis made by Santhakumar show that upper incomegroups (i.e., the topmost 40% in the income ladder) receive a significant share of the electricitysubsidy in the so-called ”anti-reform” states. Thus, there is scope for reducing subsidy first forthe higher income groups without causing much wider social opposition. Once out of thesubsidy net, these higher-income groups will enhance the support base for drastic efficiencyreforms of the utilities.

3. While analyzing the impact of tariff (or subsidy), it was seen that those who pay a highertariff (or who get less or no subsidy) are 1.5 times more likely to support privatization or 3.6times more likely to be indifferent. This is the most striking result of the analysis carried out here,implying that the reduction of subsidy or the prevalence of near-cost tariffs would encourage

people not to oppose (if not necessarily to support) privatization of electricity utilities. It was alsoobserved that those who are currently paying more already are ready to pay more still for betterquality electricity. This clearly indicates that those who pay near-cost tariffs can afford to do soand regard it as beneficial rather than to depending on an alternative means of gettingelectricity, such as self-generation. Those who pay more are also likely to view their electricityutility as inefficient. Less than 5% of the consumers in all states use alternative sources and orequipment if their expenditure per unit of energy is higher than that of the centralized electricitysupply. This has important implications. Costs will need to be reduced significantly, asotherwise government transfer may have to continue in order to sustain the current quality. Thisis also directly attributable to the large extent of nontechnical lessons which are currentlyrecovered through additional uplifts on tariffs.

4. The survey also elicited households' perceptions on any improvements in the quality ofelectricity supply during the last 3 years. There have been improvements in the quality in five(out of 13) states, but in two of them people perceive an “unreasonable” increase in tariff.

5. The study shows most people who oppose reforms are doing so not because they areideologically or culturally against it. There are reasons of rationality and self-interest behind thisopposition. Opposition to market-oriented reforms is not intrinsic to any particular income groupor class (such as the poor). In fact, the poor do not seem to be opposing much at all. Nor is it

1Santhakumar, V. 2006. Unpublished Thesis. Poverty and Social Impact of Power Sector Reforms in India. India.



60 Appendix 4

that the middle class opposes reforms in all situations. They oppose when it suits them, andthey are not opposed to trying privatization when they already pay near-cost tariffs. Theiropposition also moderates when they receive poor quality service.

6. Industrial and trade establishments generally support electricity reforms in the country.The employees of the utilities by and large oppose the reforms in all states, even though

assurance is given that there will be no retrenchment as part of the reforms. It is argued that thefarmers who receive very highly subsidized electricity oppose reforms. However, very littleknowledge exists on the position of society or households, in general. Moreover, it is the positionsof households that reflect in electoral choices in democratic societies.

B. Assam

7. The quality of electricity supply in Assam continues to be such that power is cut off foraround 2 hours daily in the capital city and for about 6 to 8 hours (including the evenings) inother parts of the state. Thus, the average duration of power cut is around 420 minutes per day(for the state as a whole). By the quality of its power, Assam is among the states that are aboutaverage (similar to, e.g., Haryana and Andhra Pradesh). Household surveys indicate that

people have seen no improvements (albeit also no worsening) in the state’s power outagesituation. Thus, the level of power cuts seems to be the same as that prevailing 3 years ago.This is evident also from comparing the load shedding reported by the utilities.

8. Some people have noted improvements with regard to voltage fluctuations. Some 23%of the customers note an improvement in the billing procedures. The majority see animprovement in the way line staff respond to consumer’s requests, and especially with regard tothe repairing of line faults and the like. Thus, it is reasonable to assume that there has beensome improvement in the customer service of the utilities during the last 3 years.

9. The tariff assistance to different segments of domestic consumers in Assam show thataverage tariffs are higher compared to other Indian states. About 67% of the consumers pay an

average tariff of Rs3 per unit (kilowatt-hour) in the state. Thus, relatively speaking, Assam inthis regard is among the higher-tariff states, which also include Karnataka, Punjab, andRajasthan. The tariff rates subsidies to many segments of consumers (including households) inAssam are closer to the average cost of electricity prevailing in other states. This indirectlypoints to improvement in the commercial performance of the utilities. Even with these higherdomestic rates, however, the majority of consumers are receiving a subsidy in Assam. This isdue to the facts that the average cost of supply in Assam is much higher, due to historicalreasons, and the cost at which electricity can be bought for the state is high due to the very lowlevel of electricity generation within the state.

10. Around 85% of the consumers in the State of Assam take less than 100 units per month.This has a number of implications. In general, it is seen that a greater percentage of consumers

in higher-tariff states such as Karnataka, Punjab, Rajasthan (and Assam) take only a smallernumber of units per month. Does this indicate an efficient and careful use of energy as pricesincreases? This needs to be verified. If it is so, then this points to lower efficiency of electricityuse in other (low-tariff) states. This issue has another implication, too, and that is with regard tothe design of a lifeline tariff. In many other states, the discussions on lifeline tariff are targetingaround 50 to 100 units per month in order to qualify for a subsidy. When 85% of the consumersin a state like Assam take less than 100 units, that level may be inappropriate. 2

2The Operations Evaluation Mission notes that the regulators in Gujarat and Madhya Pradesh were considering 30kilowatt-hours per month, as suggested by the recent regulators conference.



Appendix 4 61

11. Most of the consumers realize that the crucial problem within the State of Assam is thelack of generation or provision of adequate electricity supply. Compared to other Indian states,many people support privatization or similar types of reforms in the electricity sector within thestate. About 60% of the connected consumers either support or are indifferent to privatization inthe state. Around 60% of the households in Assam do not have electricity connections at all,

and 90% of these do not oppose privatization. The combined support or indifference toprivatization is very high in the state. The picture is similar to those of states like Bihar orGujarat, as evident from Santhakumar (2006), where the prevalence of higher tariff rates and/orpoor quality of supply encouraged significant sections of society to support drastic reforms suchas privatization. Commercial and industrial consumers vehemently support privatization. Frominterviews conducted in Assam, only six out of 27 commercial and industrial consumerssurveyed opposed privatization, whereas 17 of them supported it and the others wereindifferent. There was support also among significant segments of domestic consumers.3 Thestudy found that sector funding has helped to improve the commercial functioning (such as theperiodical revisions in tariff, customer service, and billing) of electricity supply in the state,although it has not helped in alleviating power interruptions. There was a distinct improvementin the power supply (as evident from the power interruption situation) in Assam.

C. Madhya Pradesh

12. The situation in Madhya Pradesh is similar to that of Assam. The power cuts do notseem to have improved in the state during the last 3 years, and power cuts of around 2 hoursdaily prevail in the cities. People do not perceive any reliable power supply within the ruralareas. The practice of providing highly subsidized electricity to farmers (which is not prevalentin Assam) is continued, even though farmers complain about the quality of supply. Tariffsassistance to many domestic consumers is lower when compared to other Indian states, and soare the costs of supply. The burden of subsidizing farmers and the state’s lesser ability to bearthat burden in Madhya Pradesh translate into poor quality of power supply. That is despiteunbundling of the electricity utilities and some visible improvements in the functioning of the

unbundled utilities, especially with regard to technical and distribution loss reduction. Despitethe subsidized tariff, the poor quality encourages significant sections of domestic as well ascommercial and industrial consumers to support drastic measures such as privatization.

D. Gujarat

13. The situation in Gujarat seems to be different. Though subsidized, farmers pay a part ofthe cost of supplying electricity to them as a tariff. The state's ability to bear the remainingburden of providing the subsidy to farmers is also stronger in comparison to states such asMadhya Pradesh. As evident from Santhakumar (2006), the domestic tariff is higher comparedto those of many other Indian states, and significant segments of households pay near or abovethe cost of the supply. The unbundling is also at an advanced stage and the state has

experience in working with private distribution companies in certain urban areas. Even thoughthere are still power cuts (for example 1 day per week for industries in the city of Baroda), thisseems to be managed well, and the quality of power during other times is reasonably good.Due to the prevalence of tariffs closer to the cost of supply, opposition to privatization is lessamong the domestic consumers.

3It may be noted that the majority of domestic consumers oppose privatization in states such as Andhra Pradesh,Kerala, and Tamil Nadu, and the picture in Assam is different from that prevailing in these states.



62 Appendix 5

DEVELOPMENT COORDINATION MATRIX FOR THE ENERGY SECTOR IN INDIA

Names ofDevelopmentPartners

Other Development Partners’ Strategies and/or Activities

Canadian

InternationalDevelopmentAgency (CIDA)

Contributed to organizational restructuring and policy reforms to improve energy

sector efficiency in several states.Current Activities:The Energy Infrastructure Services Project, Phase II, supported power sectorreforms in three states: Andhra Pradesh, Madhya Pradesh, and Uttar Pradesh.Activities in Uttar Pradesh are now completed. Activities in Madhya Pradesh andAndhra Pradesh were completed in 2006. Due to the phasing out of Canadianbilateral assistance to India, CIDA will not provide any further direct assistance inthis sector.

Danish InternationalDevelopmentAgency (Danida)

Assistance for wind turbine test stations and production.

Department forInternational

Development (DFID)

Power sector reform assistance in Andhra Pradesh, Madhya Pradesh, and Orissa.Cofinancing of technical assistance (TA) with the Asian Development Bank (ADB) in

Madhya Pradesh, and restructuring of the Grid Corporation of Orissa.Japan Bank forInternationalCooperation

Several loans for transmission, distribution, thermal and hydroelectric powerprojects, and renewable energy. Future assistance may include power distribution,transmission, and hydroelectric power.

Germany Loan assistance for augmenting power generation capacity in Andhra Pradesh.Loans for hydropower and nonconventional sources of energy. Support for creditlines to financial institutions for various energy projects, including renewable energy.Advisory services to the Ministry of Power on energy efficiency.

United StatesAgency forInternationalDevelopment(USAID)

Assistance to improve the commercial viability and performance of India's energysector by improving water management and electricity distribution, as well as bypromoting access to clean energy technologies. Helps reduce losses and improvecost recovery in water and electricity, improves water and power management, andhelps lower greenhouse gas emissions.

United NationsDevelopmentProgram (UNDP)

Activities are included in the environment section.

World Bank Ongoing state power sector restructuring loan to Rajasthan, plus assistance toPower Grid Corporation and for developing renewable energy sources. In keepingwith priorities agreed with the Government under the India Country Strategy forFY2005–2008, World Bank is developing activities in the following areas: (i)developing the national power grid, with a focus on enhancing the efficientgeneration and allocation of electricity; (ii) developing environmentally and sociallysustainable large-scale hydropower; (iii) supporting expansion of electricity access inrural areas, with a focus on piloting and scaling up sustainable “last-mile” deliverymodels, and (iv) supporting ongoing reforms of state-level utilities and improvingtheir service delivery. The World Bank is developing a carbon finance portfolioaligned with these activities and exploring options for additional support for low-carbon growth of the power sector, notably through coal station rehabilitation.

Source: ADB. 2005. India: Country Strategy and Program Update of (2006-2008), Manila.



Appendix 6 63

OPERATION EVALUATION MISSION CASE STUDIES

1. Within the scope and budget of the evaluation it was not possible to evaluate all AsianDevelopment Bank (ADB) power sector operations in full. The SAPE was therefore focused ona sample of lending and nonlending operations:

(i) ADB Loan 907, Unchahar Thermal Power Project

(ii) ADB Loan 1465 Renewable Energy Development Project(iii) ADB Loan 1968, State Power Sector Reform Project.(iv) ADB Loan 1405 Power Transmission (Sector) Project(v) ADB program loan 1803 and project loan 1804 for the Gujarat Power Sector

Development Program, along with associated technical assistance grants(vi) ADB program loan 2036 and project loan 2037 for the Assam Power Sector

Development Program, along with associated technical assistance grants(vii) ADB program loan 1868 and project loan 1869 for the Madhya Pradesh Power

Sector Development Program, along with associated technical assistance grants(viii) ADB TA 3885 Energy Efficiency Enhancement Project(ix) ADB TA 4496 Capacity Building for Clean Development Mechanism(x) A private sector investment in a liquefied natural gas (LNG) plant at Dahej

1. Unchahar Thermal Power Project

2. The Unchahar Thermal Power Project was approved by the ADB Board in September1988. The proposed executing agency (EA) was the Uttar Pradesh Rajya Vidyut UtpadhanNigam . The EA was already in the process of implementing 2 x 210 megawatt (MW) units atUnchahar. The proposed loan was intended to double capacity by adding a further 2 x 210 MWunits in order to meet significant capacity shortfalls in power supply in Uttar Pradesh. The firsttwo units were commissioned in November 1988 and March 1989. The two units were notoperated successfully, however, and work on the two additional units did not begin.

3. In February 1992, National Thermal Power Corporation (NTPC) took over the power

station as part of a settlement of amounts owed to NTPC. At the same time, NTPC wished todevelop the two additional units. NTPC, with Government support, requested that it become theEA for the project. This change was approved in November 1993.

4. After the takeover, NTPC identified many shortcomings in the implementation andmanagement of stage 1 of the Project. Numerous items of equipment had not beencommissioned. Employee morale was low and industrial relations were poor. NTPC’s firstpriority was to make the existing units work effectively, as the plant load factor was about 18%and there were numerous industrial relations problems and operational shortcomings. Variouschanges were implemented over the next 2 years and new equipment was commissioned.Availability and plant load factors rose to over 92% by FY2004-2005. Part of the loan wascancelled because of savings in the procurement process, reducing the final loan amount from

$160 million to less than $127 million. Subsequently the entire plant has run at a very high plantload factor (95.7% in FY2005-2006) and is described by NTPC as a crown jewel. The plant haswon performance awards, both within NTPC and externally, and enjoys a strong reputation as asocially responsible employer. The study rates the Project “successful” and supports thefindings of the project completion report (PCR).

5. The Unchahar Thermal Power Project has been successful, but for ADB this is partly afortuitous outcome. UPRVUN was a failure as an EA. The problems at the company werebeginning to affect its performance at the time that ADB selected it as the EA for the two newunits at the power station and became more serious over time. The first two units of the project



64 Appendix 6

were not implemented successfully. ADB could itself have recognized this and sought analternative EA. In fact, it was only through the involvement of NTPC that the problems atUnchahar were identified and resolved. ADB was not involved in the decision for NTPC to takeover the two existing units and it took some 18 months to agree for NTPC to become the EA forthe new units. The eventual outcome has nevertheless been a positive one.

2. Renewable Energy Development Project

6. In 1996, an Ordinary Capital Resource loan of $100 million was approved by ADB forIndian Renewable Energy Development Agency (IREDA) to develop its expertise to promoteand fund renewable energy (RE) technology in India. The Project funded 318 megawatt of wind,biomass cogeneration, landfill gas and solar energy projects and significantly avoided increasesin emissions that would otherwise have been produced by coal-fired plants.

7. The Project has had a catalytic effect on funding for the renewable energy sector, and ithas led to sustainable private sector investment and financing of wind generation. IREDA hasbecome a successful source for ongoing financing of new RE projects, although competitionfrom commercial banks and a lack of inexpensive funds has largely reduced its capacity to fund

wind power projects. Expertise gained by IREDA has led to its being recognized as the leadingsource for appraisal of RE projects, enabling it to successfully fund viable cogeneration, solar,and landfill gas generation projects. Both changes in investors, who are now predominantlydriven by energy generation rather than (as previously) fiscal incentives, and better projectappraisal skills are reflected in improvement of the company’s balance sheets since publicationof the PCR. However, the study has some outstanding concerns over the level of doubtfulreceivables, which is about 7% of outstanding loans.

8. Additional effects were noticed during site visits. These included start-up economicactivities, such as for cane transportation, lignite storage, industrial security services, tea stalls,and vehicle maintenance and repair units and/or shops. Direct and indirect employment forsemiskilled and unskilled people resulted in quality of life improvements for employees and their

families. Discussions with managers and employees of selected subprojects indicated increasesin average household monthly income from Rs1,000 to Rs7,000. Development of access roadsto the subprojects led to improved connectivity for villages with town and/or districtadministrative centers.

9. As with the State Power Sector Reform Project (Loan 1968-IND) (see below), ADB’slending product is no longer competitive with local funding, and IREDA is acceleratingrepayments. However, IREDA has identified more than 5,000 MW of RE (biomass) projects thatcommercial lenders do not have the expertise to assess or fund. ADB will need to review itsproducts if it is to maintain its presence in the RE sector in India.

10. Due to the relatively low share of power from RE projects and the time needed to reform

the power sector in the new context, the 2003 Electricity Act will not immediately result insignificant impacts on RE projects. To prepare the sector for the emerging regulatoryenvironment, harmonization of renewable energy policies with the overall power policy isneeded. Reforms at the distribution level would set the stage for a more hands-off approach tocreating incentives for private sector investments in RE projects. The other outstanding concernfor development of the RE sector is the poor financial condition of the state electricity boards,and thus their capacity to guarantee RE energy payments. ADB support for this project washighly praised for its innovativeness and flexibility and the study fully concurs with the“successful” rating given by the PCR.



Appendix 6 65

3. State Power Sector Reform Project

11. The State Power Sector Reform Project (Loan 1968-IND) was approved in December2002. The borrower was the PFC. The original loan amount was $150 million but only $50million was disbursed and the balance of the loan was cancelled at the request of PFC.

12. The objective of the Project was to support investment in state electricity boards (SEBs)which were committed to power sector reform. The project was to improve system operationsand reduce system losses in power plants, transmission, and distribution. State electricityboards in Assam, Karnataka, Maharashtra, Punjab, Tamil Nadu, and West Bengal wereidentified as possible recipients. The funds were onlent from PFC to the state electricity boards.

13. There were extensive conditions for the loans, both on PFC itself and on the stateelectricity boards as sub-borrowers. State electricity boards had to prequalify for loans based ontheir reform plans. Thereafter, the first subproject for each state electricity board had to beapproved by ADB as well as any subproject costing over $10 million or that involvedresettlement or significant environmental impacts. In several cases, states became impatientwith ADB conditions and began work using other funding sources. As a result, such projects

were no longer eligible for ADB finance. The scope and level of detail on the loan conditionswere major factors in the cancellation of $100 million of the proposed loan. Both PFC and thestate electricity boards themselves could borrow funds from other sources more easily. PFCwas disappointed with the outcome of the loan, on which it had commitment charges. Itcancelled only reluctantly when it was clear that take-up would not be adequate and afterdiscussions with ADB about ways of simplifying procedures.

14. As an example of the procedural problems, PFC cited environmental issues. PFC’s ownapproach is to impose environmental conditions but to leave it to the borrower to ensurecompliance within the framework of Indian law. Environmental issues led to lengthycorrespondence on a number of ADB projects.

15. The study concludes that the on-lending product is no longer suitable for the Indianmarket, as ADB is not able to compete with local funding, and it rates the project “partlysuccessful.” The study confirms the “partly successful” rating of the PCR.

4. Power Transmission (Sector) Project

16. The Power Transmission (Sector) Project (Loan 1405-IND) was approved in November1995, following an appraisal process that had begun in September 1994. The EA was thePower Grid Corporation of India. The original amount of the loan was $275 million, but $23million was cancelled during loan effectiveness. The project supported a number ofimprovements in India’s Power Grid that are parts of ambitious plans to create a single nationalgrid by 2012. ADB has since approved further loans to Power Grid of $250 million (Loan 1764-

IND, approved in October 2000) and of $400 million (Loan 2152-IND, approved in December2004).

17. The project also supported broader policy dialogue with the Government to achieve therestructuring and unbundling of the power sector, permit the entry of independent powerproducers, and ensure that Power Grid was financially viable. The various elements of theProject have all been completed successfully, albeit with a slight delay in project implementation.Restructuring and reform of the power sector is continuing.



66 Appendix 6

18. Power Grid is a large company with well developed management and technical expertise,and it has borrowed extensively to finance grid development. It invested about $450 million inFY2004-2005 and investment is likely to stay at similar high levels as the grid develops. ADB isa minor lender and accounts for only 7–8% of Power Grid’s borrowings. Other lenders includethe World Bank, European Investment Bank, Japanese Bank for International Cooperation(JBIC) as well as many local and foreign banks. The World Bank and ADB share a common

agenda in lending to Power Grid.

19. Power Grid wants to continue to borrow from ADB and is appreciative of the assistanceit has received. This reflects Power Grid’s continuing large investment program, the long-termnature of ADB loans, and the tax advantages (through avoiding customs duties) that result fromusing ADB resources. But while ADB’s financial involvement is paramount, Power Grid alsovalues the role ADB has taken as a catalyst for power sector reform. It that, too, ADB’s adviceon developing its environmental standards and social policies and on designing its procurementprocedures has assisted with its institutional development. These factors, along with theadditional credibility that Power Grid gains as an ADB client, are also vital parts of the lendingrelationship.

20. However, Power Grid feels that ADB attempts to exercise too much control over thedetail of Power Grid decisions. It finds the ADB less flexible than the World Bank or the JBICand wants more autonomy over spending decisions. Power Grid wants to be permitted to fundprojects retrospectively and to decide which projects it will fund with ADB resources when theloan is made and not as a prior commitment in lending covenants. It feels that ADB’scommitment charges are high and the notional disbursement schedule upon which they arebased is inflexible and often not realistic for the projects that are being funded. It finds someADB conditions irksome, such as to be asked for a resettlement plan for a transmission lineproject when it is not the company’s policy to acquire land but rather to pay compensation forcrop losses. The PCR rated the Project “successful” and the study concurs with this evaluation.In India, a central government agency such as Power Grid is required to borrow directly fromADB. ADB’s requirement of a negative pledge as security in addition to a sovereign guarantee

often makes our product such as an MFF less attractive. Central agencies in the power sectoractively borrow from the domestic market to meet their huge capital investment needs byproviding their assets as security. The negative pledge requires them to come to ADB for priorconcurrence each time they provide their assets to lenders and go through cumbersome legalprocess to give ADB pari passu security. This creates for both ADB and borrowers hugeamounts of administrative work while not providing additional assurance of repayment in thepresence of a sovereign guarantee. It is strongly suggested that ADB should be more flexibleabout negative pledge requirement when lending with sovereign guarantee.

5. Gujarat Power Sector Development Program

21. ADB program and project loans for the Gujarat Power Sector Development Program

were approved in December 2000, along with technical assistance grants. The program loan(1803), of $150 million, was in three equal tranches, with the release of each tranche dependenton progress in the power sector reform program. The conditions on the first tranche includedestablishment of the Gujarat Electricity Regulatory Commission (GERC), approval ofrestructuring by the state government, a tariff award by GERC, creation of generation andtransmission companies, circulation of a metering plan, approval of budgets and a staffingstructure, and payment of municipality dues. Similar conditions, related to development of thereform program, applied to subsequent tranches.



Appendix 6 67

22. The project loan (Loan 1804-IND) of $200 million funded investments by the GujaratElectricity Board (GEB). The loan agreement proposed funding for transmission lines,substations, upgrading of distribution, and a pilot scheme for drip irrigation. The drip irrigationproject was subsequently dropped and this part of the funding was cancelled.

23. Three TA projects 1 were included in the Program, covering preparation of a

reorganization plan for GEB, consumer awareness and participation in reforms, and support tothe GERC. These TA projects supported key aspects of the reform program and have allinfluenced the course of the reform program.

24. The lending and TA package offered by ADB was clearly well prepared and offeredcomprehensive incentives to implement a reform program. It provided both GEB and the stategovernment with funding to enable reform implementation and the TA needed to ensure that theProgram was well designed. There is now a very high level of ownership of reforms in thesuccessor entities that have replaced the GEB.

25. The rating agencies CRISIL and ICRA, which carry out ratings of state power utilities,have noted significant improvements in Gujarat in recent years, including significant reductions

in financial losses, formulation of a financial restructuring program, and the Government’scontinued support for reform. ADB’s assistance has therefore clearly been successful and theremay be learning points from the Gujarat experience that can be applied in other states. Thefinancial and organizational restructuring have turned around the finances of Gujarat StateElectricity Board from a loss-making enterprise to a profitable organization without an increasein tariffs over a 4-year period. The average cost of service has gone down from Rs4.15 perkilowatt-hour in FY2003–2004 to Rs3.53 in FY2005-2006, and average realization has gone upfrom Rs2.84 to Rs2.98 per unit without any increase in tariffs. Subsidies have been reducedfrom 19.2% of revenues to 15.9% and, when included in annual revenues, these have broughtthe companies into a situation of net profit

26. There are a number of factors that contributed to the rapid success of Gujarat’s reform

program, in addition to the well-structured support package offered by ADB,(i) There was already agreement between state government and the utility on the

need for restructuring and the approach to adopt before ADB became involved.The Gujarat state government had passed necessary legislation before thefederal 2003 Electricity Act, reflecting local understanding of the need for change.The government has maintained this commitment. It has, for example,encouraged the recruitment of professional management and avoided politicalappointments, taken over some of the sector’s debt, and committed to providecontinuing financial support for agricultural consumers.

(ii) There is a broadly commercial culture in the State of Gujarat. As a result, theneed for reform has widespread acceptance among consumers.

(iii) Staff accepted reforms as a result of tripartite agreements between the state

government, the utility, and unions. All 50,000 staff received commitments about job continuity, and in many cases staff gained promotions as a result ofrestructuring. Some 3,000 people have been recruited with a 3-year trial period toreplace retirees. Overall, the companies have the technical and commercial skillsneeded to reform the utility, and performance has been enhanced by settingtargets for staff.

1ADB. 1996. Development of a Framework for Electricity Tariffs in Gujarat (Loan 2739-IND). Review of Electricity Legislation and Regulations in Gujarat (Loan 2740-IND). Financial Management Support to Kheda and Rajkot Distribution Centers of Gujarat Electricity Board (Loan 2741-IND). Manila.



68 Appendix 6

(iv) The bifurcation of all rural feeders to separate power for villages from power foragricultural consumers is highly successful. Agricultural consumers now obtainpower for a predictable 8 hours per day and at a concessionary rate. Ruralvillages and households are continuously connected. Because agriculture poweris not supplied at system peak, some 500 MW of load has been removed fromthe peak and the system load curve is almost flat. Households are happy to have

a continuous supply while farmers appreciate the improved reliability of supplyduring the 8-hour period and have accepted the change.

(v) Metering is now compulsory for all consumers. The metering program is not yetcomplete, with about 400,000 (out of 8,000,000) customers still unmetered. Butsome 60% of meters have been replaced and meters have now been placed onall feeders, enabling greatly improved monitoring of losses.

(vi) A growing industrial sector in Gujarat is keeping revenue buoyant.(vii) There were significant opportunities for reducing costs and improving

performance. Negotiations with independent power producers resulted inreductions in unit rates from Rs2.34 in FY2003–2004 to Rs2.06 in FY2004–2005and Rs1.85 in FY2006–2007. The load factor was on generation plant and fuelmanagement were both improved. Interest rates on borrowings were

renegotiated and reduced. As a result of better system monitoring, transmissionand distribution losses were reduced by 6–7% over the past 2 to 3 years and arenow around 26–27%. Collection efficiency was boosted from 91–93% of billingsto near 100%.

(viii) Tariff levels and structures have been adequate to sustain cash flow. Theregulator granted increases in 2000, including a 300% increase for agriculturalconsumers. The next increase came in June 2004, when rates rose by about 1%,and a further application was being processed at the time of the Mission. Overall,there should be a profit across the group in FY2005–2006.

(ix) The quality of regulation has been good. The regulator has appropriate expertiseand has pressed for improvements in performance. There are goodcommunications with all power sector stakeholders. There is transparency at the

regulator through publication on the Commission’s website. The regulator hasalso published a future road map for the sector, covering such topics as openaccess and consumer choice.

27. The authorities in Gujarat are appreciative of the support they received from ADB andrecognize the contribution this made to the success of the Program. However, there were somecriticisms of ADB’s performance. Essentially, it was hard work to use ADB (and World Bank)money, because so many decisions had to be approved in Manila. Furthermore, ADB and WorldBank procurement procedures were less cost-effective than the utilities’ own bidding procedures.The most intense dissatisfaction concerned the drip irrigation project, where GEB was unable toproceed because of the involvement of an Israeli company. But there were other concerns, forexample over the specifications for transformers in tender documents and over GEB proposals

to test meters, which was not permitted under ADB procedures. The overall outcome is thatGEB does not propose to seek any further multilateral funding for the development of its powersector, preferring to rely on sources within India. Funding is freely available and GEB believes itcan borrow funds at an interest rate below the effective ADB rates.

28. The reform program for the power sector in Gujarat is well advanced but not complete.Several senior staff members hold positions in more than one of the newly created subsidiariesas well as in the holding company. State government approval is still awaited for some aspectsof asset transfers, although assets and liabilities have all been allocated to the new companies.The holding company is still acting as a corporate treasury. Further capacity building is needed



Appendix 6 69

to enhance the skills of employees. The GEB is implementing an Oracle Enterprise ResourcePlanning system to fully computerize its finances, planning, and operations. This will take afurther 4 years to complete. Tariff reform continues under the 2003 Electricity Act, and openaccess is planned from 2009. The distribution companies recognize the need for furtherreductions in technical and distribution losses. Although they have fallen in the last 2 to 3 yearsto around 26–27%, losses remain very high in the Western (44%) and Northern (32%)

distribution companies, which have many agricultural consumers. Rural electrification remains amajor challenge, with significant investments taking place under the rural elctrcification scheme.Privatization might be considered in the future, although it is not current GEB policy.

29. There are numerous reasons why power sector reform has progressed so well in Gujarat.While the state provides an excellent model of how power sector reform can progress, and howADB can support that process, it would be unrealistic to expect all other states to progress asfar or as quickly. The study rates the overall program and project loans together with theassociated TA “successful” bordering on “highly successful.”

6. Assam Power Sector Development Program

30. ADB provided a policy loan (Loan 2036-IND) of $150 million and an investment loan(Loan 2037-IND) of $100 million for the Assam Power Sector Development Program. The loanswere supported by TA, which was administered by ADB but financed from the India Trust Fundof the UK’s Department for International Development (DFID). The loans were approved inDecember 2003. Two previous ADB TA grants had prepared the way for the loans bysupporting the development of a power sector development program and capacity building inthe Assam Electricity Regulatory Commission (AERC). The policy loan was divided into twotranches of $90 million and $60 million. Conditions on the first tranche included actions by theAssam state government to sanction necessary staffing for AERC, development of anunbundled industry structure including at least three distribution companies as well asregistration of the new companies, commitment to budgetary support, some financialrestructuring, and filing of a tariff petition. The most important effect of the restructuring has

been the financial turnaround of the Assam distribution sector, which raised revenues andreversed its cost increases.

31. The detailed planning that preceded the loan had been complemented with acommitment to reform from the power authorities in Assam. Throughout the sector, there is anacceptance that the overall conditions imposed by ADB were well thought out and necessary tosupport change. Financial restructuring would not have taken place without ADB. Procurementprocedures have been improved. There is general support for the principle of unbundling.

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70 Appendix 6

32. Unbundling is partly complete and there are five new companies responsible forgeneration, transmission and distribution (three companies). The new companies areestablished under the 1956 Companies Act and are owned by the state government. AssamState Electricity Board (ASEB) is not acting as a legal holding company. In many ways, however,it continues to behave as a holding company and there is limited separation between the

finances and human resources of the five companies. The three distribution companies, inparticular, are still largely behaving as a single unit. Power purchasing is a central function andthe three distribution companies have identical tariffs.

33. Staffing issues have complicated the restructuring process. ASEB had around 16,000employees when ADB became involved. There had been no recruitment for 10 years and, as aresult, the workforce is aging. Many staff are approaching pension age and there are fewyounger staff with the information technology skills needed to run a modern utility. This hascreated many problems for ASEB. For example, most of the linemen are aging and no longerable to climb poles. Clerical staffs have no experience of working with computers. In the pastyear, ASEB has taken on some 70 graduates, 85 diploma engineers, and 45 accounts officers.There are plans to recruit 50 more engineers this year. The new staffs are generally information

technology literate and enthusiastic.

34. There is uncertainty over how many staff the new companies will need, especially indistribution. Work undertaken by Snowy Mountains Engineering Corporation (SMEC) hasestimated total staffing needs in the distribution companies at 14,087 people, which on someestimates is around current staffing levels. But recent submissions to the regulator show totaldistribution companies staffing as 10,765 and falling to 9,974 in FY2006-2007. SMEC’s figuresare not fully accepted, and it seems that further analysis will be required in the new companiesto establish final staffing needs and the skills sets of those staff. At present, moreover, stafftransfer between companies without much consideration for procedures. The high levels ofretirement over the next few years offer an opportunity to restructure staffing, but the pensioncosts are also high.

35. As part of the process of reducing political interference in the sector, the Governmenthas established an independent committee to make senior power sector appointments. It hasexternal membership from organizations such as Power Grid and PFC. The current managingdirectors of the new companies are temporary and one is on secondment from the publicservice. Permanent appointments will be made through the committee.

36. Pensions have proved to be a major issue. When ADB made its loan, there was noemployee database and hence the uncertainty over the number of staff and their age structure.Analysis undertaken in the past 2 years, with support from consultants, has exposed a majorshortfall in funding for pensions. This has been partially remedied. Government has providedadditional funding and ADB has picked up $48 million of costs through another project.

37. Transmission and distribution losses have fluctuated since the ADB loans were made,as shown in the following table.



Appendix 6 71

Table A6.1: Transmission Losses ASEB

Financial Year Transmission anddistribution losses as a %of power available for sale

2000-2001 39.802001-2002 42.502002-2003 39.072003-2004 36.292004-2005 38.94

Source: Operation Evaluation Mission.

38. There are doubts over the reliability of the figures. In discussion,PricewaterhouseCoopers suggested that the FY2004–2005 figure was a reasonable estimatebut the FY2003–2004 figure was too low and a more accurate figure would be about 40%.Errors arise because a large number of consumers are not metered and billing records are notreconciled properly. However, the figures do illustrate that there is considerable scope for

improving operational and financial performance by reducing losses.

39. There are still about 80,000 unmetered consumers in rural areas. A meter installationprogram is in progress and all new consumers receive a meter. All 11-kilovolt feeders are nowmetered, and this has exposed examples of very high losses (e.g., 64% on one line). Only 25%of households are electrified and hence there is likely to be considerable expansion in the nextfew years. In order to help meet this challenge and manage losses, the distribution companiesare introducing a rural franchising scheme under which franchisees undertake billing and cashcollection.

40. Accounting issues are many (see Appendix 7). As part of the efforts to improve theiraccounting and finance, the distribution companies are starting to computerize—with the initial

focus on billing. There are around 150 accounting units, divided between 14 circles. Computerbilling is being rolled out in phases, with the first phase covering three of the circles. The newsystems provide better management information and enable faster billing. Progress so far hasbeen good, and plans call for achieving 100% coverage within a period of 3 to 4 months. Thereis no communications connectivity between offices or with the center at present. This impedesboth effective backup procedures and data consolidation. Full connectivity is likely to take timeto achieve and involve a combination of land lines, mobile communications, and very smallaperture technology. Data backup procedures involve keeping a copy of the data on site on tape,and there are clear security shortcomings.

41. There are plans to computerize other aspects of accounting in the longer term, but this isbound to be both costly and time-consuming. Other deficiencies in accounting systems will need

to be addressed, such as the absence of fixed assets registers. Further cleanup of accountingdata is needed, which requires a more thorough reconciliation of records between accountingunits, circles and the head office.

42. Pilot schemes are being initiated to demonstrate the effects of monitoring andreconciling billing with meters, decentralized transformer maintenance and parts procurement,and customer service centers. The benefits of increased metering and monitoring are beingrealized through the faster identification of nontechnical losses and matching transformer datawith computerized billing of meters. A pilot project reduced losses in one feeder having mainlyindustrial customers from over 65% to 6% in only 4 weeks after the controls were established



72 Appendix 6

(see figure 2 below). A similar pilot project reduced transformer failures in one circle from anaverage of 12% to 0% over a 22-week implementation period. Customer service centers havebeen set up in several districts, where all customer service requests and complaints are loggedon computers and are being regularly monitored. This has increased transparency, andcustomer response will in future be part of the performance-based regulation of the Assamregulator. There has been widespread acceptance of these pilot programs by management and

employees and they are now being gradually introduced throughout Assam.

% Losse s

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43. ASEB has had difficulties in presenting audited accounts to ADB on a timely basis.ASEB’s accounts were unreliable and the audit reports on those accounts were also unreliablein the sense that they were incomplete. Hence the level of assurance that ADB has gained byseeking audited accounts is quite limited. It is entirely appropriate and understandable that ADBshould request the accounts, and the timetable for completing the accounts and audit hasgenerally been reasonable. However, in these circumstances, ADB needs to take a long viewand assess whether progress is being made to improve accounts rather than becoming undulyfocused on whether exact deadlines are being met. Cleaning up accounts is often slow and

contentious, as it involves detailed reconciliation of ledgers, writing off old balances, andrecognizing losses that often occurred some years ago. Consequently, the process of cleaningthe accounts commonly delays the finalization and audit of the accounts. In circumstances suchas Assam faces, it is worth waiting and delaying the audit as the resultant accounts are likely tobe to a higher standard.

44. ASEB has benefited significantly from technical assistance, both before and since theADB loans were made. Currently, ASEB is receiving advice and support from SMEC andPricewaterhouseCoopers. SMEC is providing implementation support on management of theinvestment program as well as undertaking a systems planning study and advising on variousother aspects of reform implementation. PricewaterhouseCoopers has been involved on variousfinancial issues and is training and supporting ASEB in loss estimation and reduction. All

consulting support will be completed by the middle of 2007 upon completion of a systems study.

45. There were initial spending delays with the project loans, largely because capacity waslacking in ASEB. Staff lacked knowledge of ADB procedures and only started to consider howto manage the loan funds after loan effectiveness. It then took a year to appoint animplementation consultant. Tasks such as route surveys were also initiated only after loaneffectiveness, and the work was then delayed by flooding. With hindsight, the surveys shouldhave been undertaken earlier. However, progress has accelerated since appointment of theimplementation consultant. Currently, expenditure is somewhat over 6 months behind scheduleand a loan extension of up to 1 year will be needed in order to complete the four remaining

Figure A6.2: ASEB Pilot Loss reduction Scheme

Source: Assam State Electricity Board.

Losses



Appendix 6 73

packages of works. The expenditure program is now adhering to the revised timetable. Thisaspect of consulting support has therefore been needed and it has worked well.

46. A regulator has been appointed for the sector and is making tariff decisions. Theregulatory function is working well in some areas in that, for example, decisions andcorrespondence are now made transparent through the internet. There have been some losses

of trained staff, however. Initial TA funding for setting up the regulator and preparing tariff filingshave established well documented procedures and guidelines for future staff. Thedocumentation was considered to be sufficiently detailed to permit a continuity of functionswithout a loss of institutional memory. Additionally, the AERC is assisting consumerrepresentatives with understanding the regulatory process and to make filings to expressconsumer concerns.

47. The introduction of time of day tariffs has shifted about 7% of demand away from systempeak. Over time, there is an expectation that Assam will move toward a more cost-related tariffstructure for each of the distribution companies.

48. Peak demand in Assam is currently around 750 MW, but this could rise to 1,000 MW if

constraints on transmission and distribution were removed. There is about 380 MW of captivecapacity in four refineries and paper mills, but the owners are currently unwilling to sell surpluspower to ASEB because they are apprehensive about synchronizing with the grid. In any case,the energy would be expensive as the generating sets burn heating oil. ASEB currentlygenerates around 20% of its own needs and it would like to increase this through rehabilitationof existing stations and new construction. There is potential for hydropower development as wellas new thermal capacity.

49. In order to sustain reform, ASEB will undoubtedly continue to need consulting support,certainly for the next 2 to 3 years and perhaps longer. Capacities of the new companies need tobe developed in many areas, including finance, information technology, human resources, aswell as core engineering capabilities. Many on ASEB’s staff are not accustomed to the business

practices of a modern utility, and it has been a challenge for the consultants to ensure thatASEB staffs are fully engaged with consulting projects, as distinct from attending associatedtraining courses. This has been an issue with the systems planning study and parts of the otherwork undertaken by SMEC. For example, the work on staffing does not seem to be fullyaccepted within ASEB. The information technology strategy component is essentially a longreport that has not been read by ASEB staff and seems to have little impact.PricewaterhouseCoopers seem to have had more success in providing process consultingsupport, which engages with ASEB staff, and it is this type of assistance which ASEB needs infuture in order to develop its capabilities.

50. This lesson may be useful in designing future programs of support for state electricityboards. There are a number of other points which may help to improve future designs. First, the

division of labor between different groups of consultants might be improved. PA Consulting’swork on finance was of very limited assistance to PricewaterhouseCoopers in advising ASEB onfinancial issues. Second, for utilities with limited internal capacity, such as ASEB, theimplementation consultant to support the utility in making use of ADB funds needs to be broughtinto place more quickly. Third, work on performance improvement and on organizationalrestructuring and human resource issues could beneficially be brought forward to earlier in theprogram. Fourth, the Assam experience makes a clear case for the use of demonstrationprojects where management and technological changes can deliver a better customer-focusedservice.



74 Appendix 6

51. Assam wants and can use more ADB loans. There is potential for rapid demand growth,which requires more transmission capacity and significant performance improvements indistribution. The reform program is clearly incomplete and ADB needs to continue to be involvedby setting covenants that promote further improvements and in financing both investments andtechnical assistance. The study concludes that the program loan and associated TA aresuccessful. The Project is not complete, however, due to earlier delays. It is showing early

indications, though, of a successful outcome.

7. Madhya Pradesh Power Sector Development Program

52. ADB provided a policy loan of $150 million (Loan 1868-IND) and an investment loan of$200 million (Loan 1869-IND) to support the Madhya Pradesh Power Sector DevelopmentProgram. The loans were approved in November 2001. The strategy for reform originated in astudy prepared in 1997 for the state government (known as the Tata Rao report, after thechairman of the committee which prepared it). It recommended unbundling, independentregulation, private investment, and greater commercial efficiency. This was followed by a clusterof six TA projects, funded by ADB and the Canadian International Development Agency, toprepare more detailed reform programs and continuing policy dialogue between the authorities

in Madhya Pradesh and ADB.

53. Restructuring has proceeded and the sector now has a regulator, the Madhya PradeshElectricity Regulatory Commission (MPERC). The Madhya Pradesh State Electricity Board(MPSEB) has been separated into a generation company, a transmission company, threedistribution companies, and a power trading company. MPSEB is still in existence, with anumber of roles such as keeping old liabilities on its books, handling old litigation, andemploying all staff. Staff transfers to the new firmss are notional and, for example, anydismissals would require approval from MPSEB. Delays in settling staff allocations stem in partfrom disputes with the State of Chhattisgarh, which was created by being split off from MadhyaPradesh.

54. Staff in MPSEB had no previous experience with ADB procedures when the loan wasagreed. As a result, ADB presented a 4-day seminar in Jabalpur before disbursement began,and this proved very helpful to staff in gaining an understanding of ADB procedures.Subsequently, some staff members participated in ADB workshops in Delhi. MPSEB alsoreceived ongoing guidance and support from ADB personnel, in both Manila and Delhi,throughout the disbursement. In general, MPSEB has received necessary approvals well withinADB timetables. MPSEB also planned ahead on civil works so that sites were prepared and alltransformers and circuit breakers could be delivered direct to site.

55. Because MPSEB was ready to proceed when the loan was approved, it obtained verycompetitive prices in FY2002–2003, when suppliers were short of work. This led to savings of$54 million compared to budget, which was reallocated to further works. The reallocation and

associated procurement arrangements were agreed promptly with ADB. As a result, MPSEB isabout 6 months late on the overall project timetable but with the benefit of additional equipmentcompared to initial plans. Issues in procurement have been small. There were delays by a cablesupplier and problems with some 132 kilovolt-ampere transformers. There were also problemswhen ADB made payment to suppliers even though MPSEB had not approved invoices in fullbecause of short deliveries or penalties. In general, though, the problems were minor and havebeen resolved.

56. The beneficial impact of the ADB loan on the transmission system can be seen clearly.Overloading of transformers now affects only four substations, compared to 58 when the



Appendix 6 75

Program began. Transmission losses have come down from 7.93% in 2002 to current levels of5.22% and should fall further to 5%. Availability is now 98.4% compared to 95% in 2002. ADBfunding has provided the testing technology necessary to enable the transmission company toundertake preventive maintenance rather than just repairs.

57. The impact of the project is less apparent at the distribution level, which has received

less comprehensive attention than transmission. However, a distribution pilot project in one area,involving 33x11-kilovolt-ampere transformers and capacitors, was a success and brought bettervoltage and transformer loadings and improved metering. MPSEB hopes to extend thisapproach and also to bifurcate some rural feeders if it obtains further ADB funding.

58. MPSEB is generally satisfied with the impact of the TA2 funded under the program. Thesole exception is a human resources project that produced few results.

59. The MPERC is taking an active role in pressing for improved performance throughregulations. It has obliged every distribution companies to appoint a head of compliance whomust report to the regulator on compliance with these regulations. MPERC has put in place aroad map up to 2012 for reducing losses, and it aims to ratchet up performance over this period.

60. The distribution companies are aiming to achieve universal metering, including foragricultural consumers, by late 2007. But this depends on the procurement of satisfactorymeters. At the same time, the distribution companies are replacing defective meters. There maybe some restructuring of tariffs, for example by extending time of day tariffs for high-voltageconsumers in the mining sector and eliminating tariffs that are based on end use.

61. MPSEB and its successor companies are targeting a reduction in technical andcommercial losses from the today’s 43.5% to 27% by 2012. The current position is animprovement from the 53% at the time ADB became involved, but it shows clear room for furtherimprovement. Revenue collection has also improved, from 80% of billings to 85%. As part of theprogram for financial improvement, there are plans for a new revenue management system.

DFID has made funding available to support this development, but progress has been slowedby opposition from vested interests. The distribution companies are also developing proposalsto franchise parts of their distribution operations. The franchisee will read meters, collect cash,and connect and disconnect consumers.

62. Major enforcement problems exist regarding electricity theft. There are about 40,000cases in the courts relating to the theft of electricity. The courts cannot cope with the volume ofcases and judges are slow to reach decisions. These delays may impede improvements incommercial performance.

63. The new power sector policy has resulted in higher tariffs for small consumers and inparticular for agricultural consumers, who were previously given free electricity. This has

created dissatisfaction with the program in certain quarters, but high-end consumers have thesame or lower tariffs than before and better supply quality. They are therefore reasonablysatisfied with the impact of reform. Agricultural demand creates a seasonal peak, with demandconcentrated in the months from October to April.

64. MPSEB has experienced delays in submitting audited accounts, and these delays haveled to loan suspensions and payment delays. The FY2004–2005 accounts are now overdue.

2ADB. 2002. Development of a Transfer Scheme for Madhya Pradesh Power Sector Reform (Loan 3882-IND). Legal Support for Madhya Pradesh Power Sector Reform (Loan 3883-IND). Manila.



76 Appendix 6

The draft accounts are complete but awaiting an audit opinion from the Controller and AuditorGeneral. It will be some time before the audit is complete and this may lead to further loansuspensions, even though audit delays are outside MPSEB’s control. MPSEB’s successorcompanies became accounting entities with effect from 1 June 2005. However, opening balancesheets are not yet finalized and the division of assets and liabilities between the companies isstill a work in progress. There is, therefore, a strong likelihood of delays on the accounts for

FY2005–2006.

65. MPSEB’s successor companies have not yet taken control over revenue management,which is still controlled centrally. The accounting function within some of the new companies isweak. MPSEB retains a central treasury function that arranges all funding with the banks. Powerpurchase is planned and implemented centrally without input from distribution companies.Consequently, the distribution companies are not subject to the market disciplines of estimating,planning and contracting supply arrangements to meet demand in their areas. Load shedding isalso planned centrally. As a result, the new companies, and especially the distributioncompanies, lack operational and financial autonomy. The lack of independence means there isno competition between distribution companies. Each distribution company charges the sameretail tariffs, and this is unlikely to change in the near future.

66. Governance arrangements on company boards need to improve. Boards have only oneexecutive director, the managing director. Other directors are part-time. A few areknowledgeable about the power sector, based on previous experience with, for example, NTPCor PFC, but the majority are not knowledgeable about the sector and have no commercialexperience. The managing directors of the generation and transmission companies areengineers and hence there is some technical capacity on the board, but the distributioncompanies have seconded bureaucrats as their managing directors. All the boards could beimproved by a better balance between nonexecutive and executive directors and by appointingnonexecutive directors with more relevant skills.

67. The chief secretary and secretary at the Ministry of Power are on the boards of all or

almost all of the companies. In the medium term, as the companies become more independentof one another, this will be inappropriate as the companies will often have conflicting interests.

68. A further loan to the Madhya Pradesh power sector for $620 million under a multitranchefinancing facility (MFF) is currently under negotiation. The South Asia Department, responsiblefor negotiating the loan, consulted with the Operations Evaluation Department to access thepreliminary findings addressed by this SAPE. All concerns raised in the SAPE with respect togovernance and risk management issues have been fully addressed by the new MFF. DFID isaddressing accounting and information technology issues with a separate loan. The study ratesthe outcomes of the TA and project loan “successful” and bordering on “highly successful” whilethe program loan is likely to become successful given the additional coordinated ADB-DFIDassistance

8. Technical Assistance (TA 3885 and TA 4496)

69. TA 3885 (Energy Efficiency) was completed in 2003 and produced a framework fordeveloping energy efficiency initiatives for the Bureau of Energy Efficiency. Therecommendations in the consultant’s report are being fully implemented by the Bureau as policy,with the state electricity boards and community organizations acting as implementing agencies.The initiatives include energy efficiency labeling programs, developing accreditation of energyauditors, and developing pilot projects to demonstrate the benefits of energy efficiency.



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70. The TA was divided into two phases. The first was to begin by conducting a baselinereview of the Government's energy efficiency policies and to identify the constraints to theirsuccessful implementation. This was in order to make recommendations on how to develop theenergy efficiency market, draft a policy matrix with a sequenced action plan for implementingthe conditions necessary for its success, and recommend how the work would be carried out.The second phase would be to develop and propose several financial products designed to

catalyze development of an energy efficiency market, while identifying financial institutionscapable and willing to offer these new products and electricity supply companies (ESCOs) thatwould utilize them. Moreover, it would identify specific subprojects for potential investments,then conduct financial and economic feasibility assessments as well as the necessary socialand environmental impact assessments for the subprojects.

71. Phase 1 was completed in a timely and efficient manner. However, implementation ofthe TA was delayed during Phase 2 because, due to the financial liquidity in the Indian economy,there was little demand among Indian financial institutions for a dollar-denominated loan to beon-lent for energy efficiency. It was determined, however, that there was tremendous demandfrom those institutions for a partial credit guarantee (PCG) from ADB to leverage themobilization of domestic resources for energy efficiency investments in industry and commercial

buildings and for financing ESCOs. The PCG was more attractive to financial institutionsbecause energy efficiency was a new market for them and what they needed was for an entity,such as ADB, to share the risk in entering that market. Consequently, the focus of the TA waschanged. Instead of a project loan (i) to develop a line of credit for financial institutions that willbe offering the new financial products to ESCOs, and (ii) for investments in specific energyefficiency subprojects, the TA is now developing a PCG facility to catalyze domestic financingfor energy efficiency.3

72. In addition to the outputs outlined above, the TA produced model monitoring andverification protocols and pro forma contracts for performance-based contracting of ESCOs.Both of these have been used by other projects since completion of the TA to execute contractswith ESCOs. In addition, the TA has resulted in an innovative financing mechanism to catalyze

domestic financing for energy efficiency that would be more suited to and sustainable for India.The study rates the outcomes “successful” and “highly sustainable.” The ongoing success of theProgram will rely on funding availability and implementation of the energy efficiency initiatives bythe state electricity boards and states. There is considerable scope to include additional energyefficiency initiatives in future sector lending. The TA is therefore rated “highly successful.”

73. TA 4496 (Clean Development Mechanism) is still in progress. It has identified severalprojects to be used as pilot projects and has developed a toolkit to evaluate potential projects.The study finds considerable progress has been made and that municipalities and financialinstitutions have been involved in workshops and consultations. The outputs of the TA supportADB and Indian national energy policy initiatives and can provide further incentives to broadenappreciation of this initiative. It is too early to rate the TA.

9. Private Sector Investment in LNG Terminal

74. The project was the first step in liberalizing and commercializing the liquefied natural gassegment of the Indian gas industry and in encouraging the use of a clean, environmentallyfriendly fuel. Demand for energy in India continues to grow rapidly, and increasing availability of

3See the project performance evaluation report for Loans 1480/1481-IND. That report also recognizes the lack ofapplicability of dollar-denominated loans and recommends the use of partial credit guarantee as a better instrumentfor developing an uncertain and/or new technology.



78 Appendix 6

energy at internationally competitive prices is critical for the country’s development. The projecthas demonstrated it is possible to import LNG successfully at competitive prices, therebysupporting liberalization of the gas sector and enhancing the level of private sector participationin the energy sector. The operating company has demonstrated the high standards ofperformance that can be achieved by a modern, well-run public-private partnership managed ona commercial basis. The business success has been excellent because of operating expenses

and interest costs that are lower than expected. Economic sustainability was rated “excellent”because of the substantial benefits derived from satisfying unmet demand and generating costsavings for firms that can use gas relative to diesel. While the project was assigned anenvironmental rating of category A at project appraisal, in practice, social and environmentalimpacts have been minimal and the main issues relate to the safety of the mooring facilitiesduring the monsoon period.

75. ADB played a critical role in facilitating the liberalization of the gas market and thenhelping to mitigate investor and lender concerns about what was a new and untested productand technology in India (and where there were limited relevant skills and experience availablelocally). ADB obtained a position on the board of directors and contributed to improvements incorporate governance by heading the audit committee.



Appendix 7 79

ACCOUNTING ISSUES

A. Assam Accounting Issues

1. Assam State Electricity Board (ASEB) has had difficulties in presenting audited accountsto Asian Development Bank (ADB) on a timely basis. Moreover, the accounts that have been

produced are unreliable even after allowance for the comments in the audit reports. The issuespredate ADB’s involvement. The accounts for FY2002–2003 (the last before the ADB loans)illustrate the problem, but there is a very similar pattern for the accounts for the previous andfollowing year. The FY2002–2003 ended on 31 March 2003 and the accounts were approved bythe board on 25 August 2003. They were then audited by the Controller and Auditor General’soffice. The audit report is undated. The format of the accounts is determined by the Electricity(Supply) Annual Accounts Rules.

2. The audit report identifies problems across many account headings. For example, someunbilled revenue has been excluded from the accounts, rebates on power purchases werewrongly calculated, invoices from power and gas suppliers are higher than the amounts shownin the accounts, interest on loans is understated, payments were posted to the wrong accounts,

physical stocks of fuel had not been properly reconciled with the figures in the accounts andthere were arithmetic errors. There were errors in both directions, but in general the audit reportsuggests that the accounts as presented were too optimistic. The audit certificate states that,subject to the observations in the audit report, the accounts present a true and fair view of thestate of affairs of the corporation. The number and nature of the errors strongly suggested,however, that there were likely to be other errors elsewhere in the accounts. Moreover, auditconcerns are often not dealt with even in the following year’s accounts. The FY2003–2004accounts detail the same concern over reconciling physical stocks to accounting records.

3. Scrutiny of the FY2002–2003 accounts readily provides examples of other areas wherefigures are unlikely to be correct. The level of advances for operations and maintenancesuppliers and work is Rs619 million, but the expenditure during the year on repair and

maintenance is Rs198 million. This strongly suggests that costs are not being moved fromadvances to expenses over a period of many years. The inter-unit transfer account has abalance of over Rs1 billion. This account should clear to zero, and the high balance suggeststhat records have not been reconciled properly between units. Net amounts receivable againstthe supply of power are equivalent to 76% of annual billings, which suggests that many debtsare likely to be irrecoverable and so the provision in the accounts is far too small. Intangibleassets and deferred costs were static from year to year and, while not significant in their ownright, this suggests that accounts are not reviewed regularly and hence there may be far biggerissues in such accounts as capital expenditure in progress.

4. Subsequently, PricewaterhouseCoopers were engaged as consultants. Their work foundeven more significant problems in ASEB’s accounting. For example, ledgers were not being

reconciled between the subdivisions (the lowest-level accounting unit) and head office. Theirwork has led to cleaning up a number of accounts as part of the process of splitting up ASEB’sassets and liabilities to form the opening balance sheets of the new companies. A number of oldbalances have been written off and the accounts are now more reliable than they were,although further effort is needed to clean them up fully. For example, the inter-unit account hasnot yet been properly reconciled and provided for. The draft accounts for FY2004-2005 includesome Rs9.8 billion of other debits and extraordinary items which largely relate to cleaning up theaccounts and financial restructuring in accordance with the financial restructuring plan.



80 Appendix 7

5. Cleaning up accounts is often slow and contentious, as it involves detailed reconciliationof ledgers, writing off old balances, and recognizing losses which often took place some yearsago. Consequently, the process of cleaning the accounts commonly delays the preparation andaudit of the accounts. In circumstances such as at Assam it is worth waiting and delaying theaudit, as the resultant accounts are likely to be to a higher standard.

6. In discussions, PricewaterhouseCoopers suggested that a number of other stateelectricity boards face worse accounting problems than does ASEB. As such, it is difficult for theController and Auditor General to hold ASEB to proper commercial standards of accountingwhen many other state electricity boards are performing to an even lower standard. Under therestructuring plans, the newly created companies have been formed under the Companies Act.This gives the new companies greater freedom over both the format of their accounts and theirchoice of auditors. There can be significant improvements in both the accounts and the auditwhen the new companies take advantage of these new freedoms, and ADB should be active inpressing them to make appropriate changes.

7. ASEB’s accounts were unreliable and the audit reports on those were also unreliable inthe sense that they were incomplete. Hence, the level of assurance that ADB has gained by

seeking audited accounts is quite limited. It is entirely appropriate and understandable that ADBshould request the accounts, and the timetable for completing the accounts and audit hasgenerally been reasonable. In these circumstances, however, ADB needs to take a long viewand assess whether progress is being made to improve accounts rather than becoming undulyfocused on whether exact deadlines are being met.

8. ADB also introduced a covenant that ASEB should reduce its accounts receivable to theequivalent of 2 months billings. As of 31 March 2003, ASEB had gross receivables against thesupply of power of Rs5.483 billion and had provided Rs110 million against doubtful receivables.The net receivables shown in the accounts were Rs5.373 billion. In the preceding year, ASEB’stotal revenue from sale of power had been Rs7.071 billion. The net receivables were thereforeequivalent to 76.0% of the previous year’s revenue and the provision against doubtful

receivables was 2% of gross receivables. These figures are not credible. There were clearlylarge amounts of irrecoverable debt in the receivables account and ADB could and should haverequired purposive action from ASEB to resolve the high level of overdue receivables. However,simply requiring a reduction to 2 months billings was unlikely to resolve the problem.

9. ASEB could have met this criterion very quickly by the simple expedient of changing itsaccounting policy to provide for all debts over some suitable age (probably between 3 and 5months). However, in practice the utility has carried out a review of its receivables with the aimof improving the accuracy of its accounts.

10. ASEB’s draft FY2004-2005 accounts show gross receivables of Rs6.560 billion and netreceivables after allowing for doubtful debts of Rs2.635 billion. This may be compared with total

revenue from power sales of Rs9.061 bmillion. The net receivables were therefore equivalent to29.1% of the previous year’s revenue and the provision was 43.3% of revenue. This is a muchmore realistic presentation of the results than in FY2002-2003. It shows some improvementcompared to previous years in that both gross and net receivables have fallen in relation torevenue. Moreover, the higher level of provisions suggests that ASEB now has a much morerealistic understanding of which debts are recoverable and which are not. These limitedimprovements are probably as much as ASEB could be expected to achieve over a 2-yearperiod. The company is still far short of the objective of reducing receivables to the equivalent of2 months billings, but it has a solid foundation for sustained reductions.



Appendix 7 81

11. ASEB could not in the short term have achieved the objective set in the covenant,except by the artificial approach of writing off all its debt over a certain age. But at the same time,ASEB has achieved a better understanding and a worthwhile restructuring of its receivablesportfolio. In practice, it would have been better to frame the covenants in a different way. In theshort term, the highest priority should be attached to collecting cash. A suitable target wouldhave related cash collections to amounts billed. In the longer term, ASEB and its new

subsidiaries should aim for an approach that reduces receivables to a realistic level of around 2months billings through a combination of separating recoverable and irrecoverable debt, writingoff amounts which are totally irrecoverable, disconnecting consumers who have longoutstanding bills and no likelihood of payment, and pursuing through the courts amounts whichmay be recoverable through this route. In practice, this often is best achieved by separating theold debt (say 6 months and older) from new debt. Special procedures are initiated for old debt,often through a dedicated recovery unit. The utility’s standard procedures should be focused onkeeping existing customers current.

B. Madhya Pradesh Accounting Issues

12. In 2001, the Government of Madhya Pradesh and ADB reached an agreement on the

basic model for the reformed sector. While successor companies have been established andnominal operational autonomy achieved, some pre-unbundling management practices are still ineffect. The Operation Evaluation Mission noted that these traditional management practices,along with some reluctance to face challenges associated with corporate reforms, will continueto retard progress toward achieving financial viability of the companies and, hence, thesustainability of the power sector. Benefits to be realized through introducing proven, modernutility management practices into the day-to-day operations were discussed. These includedbuilding on the foundations of good corporate governance now in place, establishing strongfinancial management capacity, and strengthening the new companies’ operationalmanagement capabilities to deliver performance improvement and, in the longer term, facemarket competition.

13. For this purpose, the United Kingdom’s Department for International Development(DFID) is providing up to £18.5 million in technical (£14.5 million) and financial (£4 million)assistance from 2006 to 2010. This initiative forms the second phase of a long-termcommitment by DFID to develop and reform the Madhya Pradesh power sector. Approved in2005, contracts for consultancy services were let and consultants fielded from April 2006.Capacity building is being provided through the following main work streams: (i) support to theGovernment of Madhya Pradesh for mapping further reforms, (ii) capacity building in theMadhya Pradesh Electricity Regulatory Commission, and (iii) financial management and humanresources development across all companies. In addition to these principal work streams,funding is also allocated for program coordination plus review and monitoring, and includingsocioeconomic impact studies.

14. Consultancy services are being delivered in a way consistent with a key theme of reform,namely to facilitate the development of increasingly autonomous, corporatized, licensed, andcommercially focused companies. Thus, where support is being provided to, for example, allcompanies on human resources by a single consultancy firm, it is to be delivered throughdiscrete teams located in each company. DFID financial assistance is for managementinformation systems technology and will be released over a shorter timescale, during theFY2006–07 and FY2007–2008.



82 Appendix 7

15. The capacity building planned by DFID is comprehensive and is at an early stage of itsscheduled 5-year program. The initial capacity building envisaged during the earlier ADBMission has therefore been partially diverted to different areas, such as supervisory control anddata acquisition, distribution management systems, and others to ensure that duplication withthe DFID program is eliminated.

16. The first quarterly review of the DFID program took place on 11 August 2006. Therewere delays sufficient to cause comment on progress in two work streams, and there weresome issues concerning coordination and integration of the consultancy effort. The first reviewconfirmed the comprehensive nature of the capacity building, however, and no adversecomments were of sufficient weight to question the potential value of the DFID program.



Appendix 8 83

POTENTIAL FOR CORRUPTION IN THE ENERGY SECTOR

1. The energy sector is a target and source of corruption because energy is central toalmost all socioeconomic activities, and power is essential to production and operation.Individuals and institutions that control access to the sources, transformation, and distribution ofenergy hold significant power. The sector’s potential for generating economic rents from energy

extraction, transformation, and use, and the large capital investments it engages, makes thesector vulnerable to corruption. Opportunities for corruption occur at all stages—from energyextraction to transformation and distribution (see Table 8.1). At the project level, corruptionoccurs during the early stages of power project identification and formulation, project tenderingand bidding, as well as operation and maintenance. Corruption in the sector is difficult to proveand determine because of the complex systems and the multidimensional scale at which theyoperate in the development of a country. Corruption may occur in developing and transitionaleconomies because judicial and regulatory systems are weak or lacking, and there may exist apolitical culture that overlooks corrupt acts.1 The central role of government agencies thatoversee virtually all aspects of the energy sector, whether privatized or not, make transactionsand decision making less efficient because decisions are often made in favor of politicalinterests. The limited prosecution of corruption cases and low conviction rates make it difficult todeter corrupt practices in the sector..

2. The forms and extent of corruption in the energy sector affect the demand and supplysides of energy operations differently. At the consumer level, what might be termed “pettycorruption” involving minor bribery and collusion happen because consumers are willing to payfor convenience (getting new connections quickly, avoiding time-consuming paperwork) hascreated a supply-side pressure that perpetuates this form of corruption. Corruption on energytransformation and distribution is manifested through

(i) nontechnical system losses (e.g., falsified meter readings, altered invoices, andillegal purchase),2

(ii) interference in the flow of funds in such forms as barter or offsets within thesystem and to fuel suppliers,

(iii) manipulation of the flows of electricity to favored customers,(iv) opaque and uneconomic import arrangements,(v) bid manipulation through limited specifications and/or pre-qualifications,(vi) commissions paid by bidders for contract awards,(vii) collusion of bidders, and(viii) payments for positions favorable to extracting corrupt payments.

3. Box A8.1 illustrates potential areas where corruption occurs in different segments of thesector and efforts the Government has taken to combat corruption.

1Mathias, Ruth. 2002. Corruption and the Energy Sector. Paper presented during a workshop on SectoralPerspectives on Corruption sponsored by the United States Agency for International Development. Washington,DC.

2Surveys sponsored by the World Bank as part of load management and agricultural electricity studies in India haveshown that 20–30% of electricity attributed to unmetered agricultural consumption is appropriated by high-incomehouseholds, industry, and large commercial establishments such as shopping malls. Such “appropriations”constitute corrupt behavior if those entities who receive electricity free or at reduced prices provide in returnfinancial or political support to individuals who are in charge of payment collection.



84 Appendix 8

Table A8.1: Vulnerability to Corruption in Electricity Sector

I. Government Policies

Activity Areas Vulnerable to Corruption Red Flags

Estimates of the additional capacityrequired to meet demand

• Manipulation of the estimates • No or inadequate analysis ofdemand

• No public consultation• Lack of transparency in

demand forecasting

Norms and procedures for licensing • Alteration of licensing criteria tofavor particular interests

• Ad hoc revisions orexceptions made to thecriteria

• Nontransparent process forrevising norms

Statutory and otherclearances

• Dilatory and repetitive procedureswith no time limit for final decision

• Vague procedures• Authorities with overlapping

jurisdictions

Sale of the energy

generated• Restrictions on who may buy the

energy and the price payableunder power purchase agreements

• Noncompetitive procurement

of independent powerproducers

Acquisition of land andrehabilitation of project-affected persons

• Payment of compensation tolandowners and resettlement ofproject-affected people

• High level of activity in landtransactions beforegovernment notification forzoning or land acquisition

• A few transactions registeredat inflated prices to raise thebenchmark for rates ofcompensation

• Opaque procedures forcompensation payments

• Several partial payments

Subsidies to specifiedconsumer groups

• Administration of subsidy,including selection of beneficiaries

• Unmetered supply• Absent or weak linkage with

means criteria

Selection of regulators and topmanagement of utilities

• Manipulating selection criteria • Undue delay in appointments• Lack of transparency in the

selection process

II. Different Stages of Project Development

Activity Areas Vulnerable to Corruption Red Flags

Project

formulation

• Technical-economic studies to

establish feasibility and viability• Surveys and site investigations• Estimation of costs and

implementation schedules• Statutory and other clearances• Land acquisition for the plant• Rights-of-way for transmission lines• Rehabilitation of persons affected by

the project

• A perfunctory study (or no study at all)•

Omitting surveys and siteinvestigations or leaving them to bedone later by the contractor

• Estimation of costs• Vagueness about procedure for

obtaining clearances• Not allocating sufficient resources for

compensation to project-affectedpersons



Appendix 8 85

Projectimplementation

• Procedure for contractor selection• Type of contract (works, labor,

turnkey) and contract documents• Monitoring and supervision of

contractor’s work• Purchase and supply of plant,

machinery, and materials• Stage payments to contractors• Completion and commissioning

• Procedure not spelled out in biddocuments

• Lack of specificity in the contracts• Failure to designate supervisors with

clear responsibilities• Not allocating sufficient funds for

payment, leading to disputes and

claims of costs escalation

Project operation • Performance of plant and machineryduring initial guarantee stage

• Execution of operations andmaintenance (in-house oroutsourced)

• Emergency repairs• Purchase and use of materials,

stores, and consumables• Emergency purchases• Payments to contractors, suppliers,

and vendors• Employee-related issues, such as

promotion, transfer, payment ofemployees’ dues such as providentfunds, various allowances, andreimbursement of expenses

• Adherence to relevant codes and• licensing conditions

• Failure to specify performanceparameters and methodology ofverification

• Failure to spell out clear procedures forroutine as well as emergencypurchases

• Requiring multiple authorizations (thusdiluting individual responsibility) beforepayments can be made

• Absence of codified and transparentprocedures

• Failure to specify responsibilities ofindividual officers to ensure compliancewith license conditions

III. Customer Interfacing Activities

Activities Areas Vulnerable to Corruption Red Flags

New connection,

additional load

• Information on procedure not clear

or not available• Harassment by utility staff

• Undue delays in giving connections•

Lack of periodic data reconciliationbetween new connections,meter-reading book, and consumerledger

Meter reading • Poor quality of meters• Irregular meter reading

• Meters that are tampered with• Meters not tested according to norms• Wide variations in consumption by

similarly placed consumers• High electricity losses in some feeder

lines• High incidence of broken meter seals

Payment and correction of bill • Errors in bill•

Collusion between utility staff andconsumer• Billing based on factors other than

actual use (such as averageconsumption or load factor)

• High incidence of billing disputes or

bill corrections• Fall in collection while consumption

remains the same



86 Appendix 8

Repair service, fuse call • Supply interruptions caused byaccidents

• Routine maintenance work

• Poor maintenance of complaintsrecord

• Undue delay in attending tocomplaints

• Frequent burning of transformers

Meter installation, replacement

of defective meters

• Inadequate protection for meters• Delay in issuing and installing

meters

• High volume of complaints regarding

quality of service• High incidence of burnt meters of

large consumers (who may becharged a flat rate for consumptionduring the period the meter is notreplaced)

Disconnection • Nonpayment of bill• Delay in receipt of bill• Pilferage by consumer

• High level of receivables• Frequency and amount of defaults in

bill payments.

Reconnection • Delay even after rectification ofcause of disconnection

• High incidence of deviation fromnormative standards of service

IV. Theft of Electricity

Activities Mode of Theft Beneficiaries of Corruption

Generation • Theft of fuel camouflaged asauxiliary consumption in thermalgeneration plant

• Unauthorized use in the homes ofgeneration plant staff

• Staff of the generation plant• Labor union leaders

Transmission • Tapping of overhead transmissionlines by large consumers

• Defective meters

• Large consumers• Politicians• Bureaucrats•

Utility managers• Transmission line staff

Distribution • Tapping of distribution lines

• Unauthorized supply of electricity

• Organized resistance to paying forelectricity

• Nonbilling and underbilling for

electricity

• Tampering with bypassing meters

• Billing consumers at a lower rate

• Consumers• Distribution utility staff• Consumers• Utility managers• Distribution line staff• Labor union leaders• Politicians• Groups of consumers acting in

concert (farmers, industries,residential areas, and the like)

• Local mafia with political protection• Consumers• Billing staff• Consumers• Linemen• Consumers• Billing staff• Utility managers

Source: World Bank. 2007. J. Edgardo Campos and Sanjay Pradhan, Many Faces of Corruption . Washington D.C.



Appendix 8 87

4. Despite the application of standard governance and anticorruption requirements in theloan agreements for energy projects, some attempts to circumvent procurement processes weredetected. As of July 2006, ADB’s Integrity Division3 had identified 49 cases involving energyprojects with allegations of corruption. Of the 49 cases, 44 were loan projects and 5 were TAgrants. The cases were spread among 11 developing member countries (Table A8.2). Based onthe investigations, these cases can be summarized as (i) irregularities in the bid evaluation

3Available: http://www.adb.org/Integrity.

Box A8.1: Anticorruption Efforts in the Indian Energy Sector

Forms of Theft and Actions Taken by the State Electricity Regulators Commissions

Generation. Corruption arose in cases where ownership of generating companies was in the private sector andthe power was sold to the Licensees (public sector). Money paid by the Licensee was, in some cases, for powernot supplied. There was collusion between the generator and the person in charge of recording the supply. Nosupervision of the recording of power received was made, nor was there any energy audit. This was taking

place largely in cases of smaller, unconventional energy generators. Similarly, power was purchased withoutreference to the variable cost and frequency. The Regulatory Commission directed the Transmission Licenseeto (i) fix 0.2 accuracy class meters at the interface points between generation company and transmissioncompany and between transmission company and distribution company, (ii) conduct regular and thoroughenergy audits and furnish information in the format provided by the commission, and (iii) develop acomprehensive procedure for merit order dispatch in consultation with all stakeholders and then file it with theCommission for approval.

Agriculture Sector. There was often no metering in the agriculture sector. Agriculture consumption wascharged based on the capacity (in horsepower) of the pump set used—the higher the horsepower, the higherthe tariff. There were about 2.3 million agricultural connections. Corruption could take place in recording thehorsepower of the pump set. Based on a number of cases, the horsepower of the pump set was higher thanwhat was incorporated in the records of the Licensee. There was collusion between the farmer and the lineman,or the farmer had upgraded the capacity clandestinely. Secondly, a large number of farmers were taking powerwithout authorized connections. The Commission directed that billing should be based on the actual capacity of

pump sets, and that unauthorized connections must be either regularized or disconnected and all newconnections must have meters.

Domestic and Commercial Sectors. In the domestic and commercial sectors, theft arose from (i) nonmeteringbecause of lack of meters, resulting in arbitrary assessment of consumption; (ii) tampering with meters; (iii)incorrect recording of meter readings to keep the consumption at a lower level and escape billing at higher ratesin a non-telescopic tariff system; (iv) ad hoc billing in case of stuck and faulty meters; (v) billing without readingmeters; (vi) supply of power through fictitious connections bypassing the meter; (vii) supply of power withoutbringing it to utility records; (viii) having multiple meters in the same household or commercial establishment tokeep the consumption at lower tariffs; (ix) continuing to supply power although power supply was recorded asdisconnected for nonpayment of bills; (x) billing made at a lower level than the actual meter reading in collusionwith the billing staff; and (xi) some consumers used domestic premises for commercial use in order to pay thedomestic tariff instead of the commercial rate.

Industrial Sector. Large-scale theft was taking place, especially in power-intensive industries—with and withoutcollusion from the utility staff. Commercial incentives to steal electricity were high since industrial tariffs were

very high because of cross-subsidies to the domestic and agricultural sectors. Theft involved (i) simplebypassing of the meter or tampering with the meter to make it run slowly, (ii) tampering with the componentswithin the meter to record lower consumption, (iii) manipulating the multiplication factor on the meter in cases ofhigh power consumption industries (in collusion with the meter installer), and (iv) laying underground bypasscables. Solutions include demand meters for consumers with intermediate connected load; for high tensionconsumers, metering should be provided on the high tension side. There were also cases where industrial unitshad their own captive generation sets and a standby connection to supply power from the Licensee. TheLicensee was actually drawing power from the high tension connection, bypassing the meter without operatingthe captive generating set. Commissions are directing utilities to launch special drives to detect theft in all casesof industrial units with captive generation sets and to intensify surprise checks in the industrial establishmentswith vigilant staff and remotely monitoring their consumption.

Source: Operations Evaluation Department.



88 Appendix 8

process, (ii) submission of falsified certificates of consultants and performance certificates offirms, (iii) procurement discrepancies and irregularities, (iv) collusion of consultants andcontractors, (v) collusion in the bid process, (vi) corruption of officials in procurement andadministrative matters, (vii) payoffs from participating firms to get the contract awards, and (viii)bribery. Allegation of corruption was the most prominent (37%) complaint, followed by chargeson fraudulent practices (26%), misrepresentation (12%), abuse of position (6%), collusion (6%),

bribery and extortion (4%), and others (8%). There were no substantiated cases of corruption inIndia, however, and this suggests that the governance measures for procurement inADB-funded projects are having their desired effect.

Table 8.2: Allegations of Corruption in the Energy Sector(as of 21 July 2006)

Country Number of Cases Percent(%)

Bangladesh 24 49Cambodia 1 2People’s Republic of China 3 6India 5 10

Lao People’s Democratic Republic 1 2Nepal 7 14Pakistan 1 2Philippines 1 2Samoa 1 2Sri Lanka 2 4Tajikistan 3 6

Total 49 100Source: Asian Development Bank. Office of the Auditor General, Integrity Division.



Appendix 10 89

TABLE A9.1 PROJECT PERFORMANCE RATINGS

LoanNo. Title Relevance Efficacy Efficiency

Sustainability Impact

OverallRating

SourofRati

Conventional Energy Generation (other than hydropower)

798 North Madras Thermal Power 3 4 3 4 4 S PPA

907Unchahar Thermal PowerExtension 3 5 2 6 6 S PC

988 Rayalaseema Thermal Power 3 4 3 4 3 GS PPA

1117 Gandhar Field Development 3 4 3 6 3 S PC

1029Second North MadrasThermal Power 3 4 2 4 4 S PC

1148 Hydrocarbon Sector Program 2 2 1 2 0 PS PPA

1222 Gas Flaring Reduction 3 4 2 5 3 GS PC

1285 Gas Rehabilitation 3 4 2 5 3 S PPA

1591 LPG Pipeline 3 6 3 6 6 HS PC


1212Energy Conservation andEnvironment Improvement 3 2 2 4 3 PS PC

1343 Industrial Energy Efficiency 2 2 1 2 2 PS PPA

1804Gujarat Power SectorDevelopment 3 6 3 6 6 HS OE

1869Madhya Pradesh PowerSector Development 3 6 2 5 5 S OE

2037Assam Power SectorDevelopment 3 5 2 5 4 S OE


1465Renewable EnergyDevelopment 3 6 2 6 5 S PC

Transmission and Distribution1161 Power Efficiency 2 2 1 2 2 PS PC

1405 Power Transmission 3 5 2 6 5 S PC

1868Madhya Pradesh PowerSector Development 3 4 2 4 4 S OE

1803Gujarat Power SectorDevelopment 3 6 2 6 6 S-HS OE

2036Assam Power SectorDevelopment 3 4 1 4 5 S OE

Average Rating 2.9 4.3 2.1 4.7 4.0GS = generally satisfactory, HS = highly satisfactory, OEM = operation evaluation mission, PCR = project completion report, PPAR

project performance audit report, PS = partial satisfactory, S = satisfactory.



90 Appendix 10

Table A9.2: Private Project Performance Ratings

ProjectOverallRating

Source of Rating

LNG Terminal HS PPER

Transmission And Distribution S PPAR

Generation S PPAR

Transmission S SESHS = highly satisfactory, PPAR = project performance audit report, PPER =project performance evaluation report, S = satisfactory, SES = specialevaluation study, LNG = liquefied natural gas.

Table A9.3 TA Performance Ratings

Conventional Energy Generation (other than hydropower) TCR TPAR OEM

1228 APSEB Operational Improvement Support PS

1229National Program for Environmental Managementfor Coal-Fired Power Generation PS

1837 Natural Gas Rehabilitation and Expansion

2008 Regulatory Framework for the Gas Industry GS

2702 Preparation of Natural Gas Development MasterPlan GS

2752 Liquefied Natural Gas Terminal GS S

2775Hydrocarbon Exploration and Production Databaseand Archive System GS


1119 Power Sector Loan

1365Tamil Nadu Electricity Board OperationalImprovement GS GS

1366 Environment Monitoring and Pollution Control GS GS

2474

Environmental Improvement and SustainableDevelopment of the Agra-Mathura-FerozabadTrapezium in Uttar Pradesh US

2490Development of a Framework for Electricity Tariffsin Andra Pradesh S

2738Preparation of a Power System Master Plan for theState of Gujarat GS S

2739Development of a Framework for Electricity Tariffsin Gujarat GS S

2740Review of Electricity Legislation and Regulations inGujarat GS S

2741

Financial Management Support to Kheda andRajkot Distribution Centers of the Gujarat ElectricityBoard GS

2980 Madhya Pradesh Power Sector Development S S

3305 Support to the Power Finance Corporation GS

3573 Reorganization Plan for Gujarat Electricity Board GS S

3885 Energy Efficiency Enhancement Project HS

3953 Assam Power Sector Development Program S

4083Building the Capacity of Assam ElectricityRegulatory Commission HS

4241 Reorganization of Assam State Electricity Board S

4243 Policy and Legal Support for Power Sector Reforms S


1953 Renewable Energy Development S



Appendix 10 91

2648Institutional Strengthening of Indian RenewableEnergy Development Agency, Ltd. GS


1756Study of Bulk Power and Transmission Tariffs andTransmission Regulations GS GS

3380Private Sector Participation in ElectricityTransmission GS

GS = generally satisfactory, HS = highly satisfactory, OEM = operation evaluation mission, TCR = technical assistancecompletion report, TPAR = technical assistance performance audit report, PS = partial satisfactory, S = satisfactory.

Figure A9.1: EIRRs

15.0

35.0

55.0

75.0

15.0 25.0 35.0 45.0 55.0 65.0 75.0

RRP estimates

P C R / P

P A R

e s t i m a t e s

All Energy Sector Projects in India

EIRR (%) at RRP and at PCR/PPAR

FIRR = financial internal rate of return, PPAR = project performance

audit report, RRP = Report and Recommendation of the President tothe Board of Directors.Source: Asian Development Bank database.

Figure A9.2: FIRRs

FIRR = financial internal rate of return, PPAR = project performance auditreport, RRP = Report and Recommendation of the President to the Boardof Directors.Source: Asian Development Bank database.

0.0

5.0

10.0

15.0

20.0

0.0 5.0 10.0 15.0 20.0

Figure 5.4: All Energy Projects in India

FIRR (%) at RRP and at PCR/PPAR

RRP Estimates

P C R / P P A R

E s t i m a t e s



92 Appendix 10

FUEL SUPPLY ISSUES

1. The following section is a brief discussion about the fuel constraints which are impedingpower generation growth.

A. Hydropower

2. Hydropower has declined in the power mix from about 46% in 1966 to its current level of26%. The lack of hydropower has increased the need for thermal-fired plant to take over aconsiderable portion of the peaking role, traditionally the role of hydropower. This hascontributed to suboptimal use of resources in the power sector. Growth in the hydropowersector has been hampered by the large capital costs, cost overruns, poor planning, inter-statedisputes, and the lack of complementary infrastructure and land.

3. India has identified over 150,000 megawatts (MW) of hydropower potential. Of that,50,000 MW is included in a scheduled Hydropower Initiative, with a 2017 target completion date.Some 33,000 MW of capacity has undergone preliminary feasibility studies, and full planning isnow underway with a view to progressing these to commercial projects. The Government ofIndia is making a concerted effort to reduce planning and development times for these projects,

including by taking a more managed approach to environmental concerns, land tenure,compensation, and interstate coordination. However, the largest hurdle will be to attract long-term finance for projects having 40-year life spans plus planning and construction periods inexcess of 8 years. In addition, there is close scrutiny from nongovernment organizations and theensuing transaction cost if there is significant localized political opposition.

B. Coal

4. Coal is currently the most important and abundant fossil fuel in India and provides for66% of India's energy. It has an advantage in its relatively low production costs. However,mobilizing capital for generation plant and supply chain investment has been a critical constrainton coal’s playing an even larger role. The underdeveloped coal market has also been a

constraint prolonging project development and placing the burden on the generation assetdevelopers to manage fuel supply chain risks. Generation losses were estimated at 1.512 billionkWh during FY2004–2005 and hampered the growth of thermal generation.54

5. Legal and policy frameworks, monopolistic industry structures, and a restrictive markethave deterred serious investment in the coal sector. The Government controls almost all coalproduction. Private mines are allowed only if they are captive operations that feed a power plantor factory. While the country has considerable supplies, it faces two major hurdles: the expectedquality of coal is gradually declining and the lead time to bring new mines on line is about 8years. India will need to import additional supplies in the near term and resolve its fuel securityconcerns in the midterm.

6. India possesses the fourth largest reserve of coal in the world (after the U.S., Russia,and the People’s Republic of China respectively). The energy potential offered by the reservesof indigenous Indian coal is 9 times higher than that of oil and gas combined. India’s indigenousextractable coal reserves offer 14.285 billion tons of oil equivalent that is expected to last 80years at the current extraction rates.55 Moreover, only 45% of India’s coal-bearing area hasbeen surveyed, and the total proven reserve is estimated at 40 billion tons of oil equivalent.

54PriceWaterhouseCoopers.

55PriceWaterhouseCoopers.



Appendix 10 93

7. Coal production during the Eighth and early part of the Ninth Plan period met theproduction targets. Production during FY1996–1997 was 286 million tons and this grew tonearly 400 million tons in FY2005–2006. With this production growth, India now ranks as thethird largest coal producer in the world behind the People’s Republic of China and the U.S.Despite this growth, there has been a shortage that has been met through imports. By the endof the Tenth Plan period, a deficit of 43 million tons is anticipated.

8. The Government’s response to the fuel supply constraints has been to divert additionalsupplies of coal to the power sector and gas supplies away from the power sector. As coal isalso a primary fuel source in the cement and steel industries, the existing and continuingconstraints on gas and coal supplies impede economic growth.

9. Coal deposits have not been sufficiently identified, making it difficult to plan extractionin the medium to long term. Investments in exploration to prove the probable reserves have notbeen adequate. The quality of coal is not very good, and ash contents are high enough tomandate washing even for power generation. Such processing may impact the economics ofpower generation from coal and tilt the balance in favor of imported coal. The locations of coalreserves also partially determine the placement of power plants. Better quality coal is at greaterdepths and requires underground mining methods for its exploitation. Historically, however,

underground coal mines have had very low productivity. Legal and administrative procedures toobtain mining leases involve both central and state government agencies. These proceduralcomplexities, which lead to delays, have been major reasons for the small number of new mineopenings in the last decade despite the sector’s being opened to the private sector. Among theimportant constraints affecting the coal sector are the following:

(i) Environmental aspects do not favor mining companies, and there are delays inobtaining permissions. Standards are not always properly understood and hencethere is failure to comply with them. That is a cause of delays in commissioningnew mines.

(ii) Because pollution control boards are state agencies, they do not respondfavorably to proposals for compensatory forestation that may be in other states.

(iii) Practical difficulties of land acquisition and project initiation have been major

reasons for project implementation delays. The relocation and rehabilitation ofaffected people are generally not properly planned, and ad hoc implementationleads to protests that cause delays. Such unplanned processes are alsoobserved to have severe cost overruns.

(iv) There is a lack of technology that could make extraction more efficient andprevent waste. The output per miner per shift in Indian coal mines is much belowthe levels achieved in, for example, Australian mines. Geological differencesexist, but technological backwardness is also one of the reasons.

10. Machinery utilization is extremely poor in the coal industry.56 When costly equipmentremains unutilized, it adds to the cost of production and results in inefficient running of theenterprise. Machines are not properly maintained, resulting in frequent breakdowns. Availability

of machines is poor due to breakdowns and long periods in repair.

11. While the coal reserves may be sufficient for the next few decades, and even though thecoal mining companies meet their targets, the gap between demand and supply has continued.This has been due to the coal mining companies’ very conservative estimates of coal demandfrom the power sector.

56M.K. Padhye. 2005. What Ails Coal Industry. People’s Democracy , XXIX:42.



94 Appendix 10

12. As coal mining will remain the main feeder sector for power generation, policies andprocedures in relation to it need to be rationalized. Also needed are investments fortechnological improvements. Some steps that could be taken to give the industry its neededboost are discussed below:

(i) There should be rationalization of the procedure for allocating mining leases. Theprocess should be administered through a group comprising competentauthorities from both the central and concerned state governments.

(ii) The mining companies should be assisted in land acquisition after all the aspects,including those of rehabilitation,.

(iii) An appropriate regulatory body should formulate standards for mineral appraisaland for the accounting aspects of reserves and their depletion.

(iv) Modernization of the underground mines has lagged since nationalization. TheGovernment should create conditions conducive to investments into new coalmining technologies that would boost productivity and safety. Power generationwould benefit as a result.

(v) Coal production is expensive when compared to imported coal. Transportation ofcoal is one of the biggest infrastructure challenges. Better transportation facilitiesneed to be developed. To make power generation from coal cost-effective andefficient, dedicated rail tracks for coal transport must lead from mine heads to

power plants.(vi) The current provisions for captive coal mines do not allow the sale of surplus coal

in open markets. This provision discourages greater mining efficiencies. Doingaway with this provision would be a step forward in ensuring the better financialhealth of captive coal mines.

(vii) Waste at various stages needs to be controlled, as this raises the unit cost ofproducing coal. Audits of coal production will check wastages and help enhancethe efficiency of mining and lower the cost of the coal feed to power stations.

(viii) Trade unionism has been often described as one of the key reasons for lowproductivity in coal mines.

(ix) There is a clear lack of corporate governance.

C. Gas

13. As a result of gas supply shortages, 38 gas-based power stations with a total capacity of9,536 MW had to operate at a load factor of only 58% during FY2004-2005.

14. The Government’s optimism with respect to the role of natural gas in the country’s powermix can be perceived from the fact that gas-based capacity additions during the Tenth Planwere revised upward from 4,749 MW to 6,395 MW in the midterm review. However theanticipated additions during the Plan period are expected to be only 4,665 MW. This target willbe missed primarily because committed gas supply agreements could not be signed and theaffordability of gas was uncertain for several plants in the pipeline.

1. Domestic Gas

15. As they have started to deplete, production from existing fields will trend downward. Theshare of private players in the Indian gas market is expected to rise, however, and especiallyafter the commencement of gas supply from the RIL-KG Basin field by FY2008–2009. This giantdeepwater gas discovery is the biggest gas find in India in three decades, and it was among theworld’s largest gas discoveries in 2002. Another major gas find in the KG Basin was announcedby Gujarat State Petroleum Corporation jointly with two private partners in 2005. This gas findcould be substantially larger than the Reliance find. However, this find has not yet been certifiedand the recoverable reserves remain uncertain.



Appendix 10 95

16. The Government has also shown a keen interest in developing India’s 1.5 trillion cubicmeters of coal bed methane (CBM). Under CBM-I and II, 13 blocks have already been awardedto public and private companies. Oil and Natural Gas Company is projected to begin the firstcommercial CBM production of 2 million standard cubic meters per day (MMSCMD) byFY2007–FY2008. By FY2009–FY2010, CBM will contribute up to 5 MMSCMD of gas. As aresult, gas production from indigenous sources is expected to increase to 167.4 MMSCMD by

2012, an increase of over 130% over the 5-year period.

2. Imported Gas

17. Liquefied natural gas (LNG) is India’s only source of imported gas at this time and it hastwo LNG terminals. The Petronet LNG Limited terminal at Dahej has a capacity of 5 million tonsannually, and the Shell-operated terminal at Hazira can handle 2.5 million tons. A number ofprojects for setting up LNG terminals have been approved by the Government and are due tobecome operational in the next few years. The Dabhol and Kochi Terminals are likely to add tothe country’s gas supply by 2007 and 2010, respectively. However, the fate of many otherterminals is uncertain, as statutory clearances have not been granted, additional agreementsand/or guarantees are needed, and, most critically, it is difficult to sign on anchor customers at

the prevailing delivered price of gas. Major end users, such as power plants and fertilizerproducers, have been reluctant to sign supply contracts because of uncertainty over the pricingof LNG and its competitiveness relative to domestic gas and other fuels. Hence, although Indiahas a strong potential to grow its gas use, the projected import potential of 59.4 MMSCMD byFY2011–FY2012 depends upon the development of LNG terminals, gas pipelines and gas-firedpower plants as well as resolving the issues of LNG pricing.

18. Gas supply shortages will continue to remain in the power sector, although the situationwill improve as New Exploration Licensing Policy gas production enters the market and LNGimport facilities are augmented. Most natural gas demand projections for the power sector havebeen based on assumptions of gas prices that are unrealistic in today’s situation. With the shareof regulated gas falling, the era of subsidized gas seems to be coming to an end for the Indian

power sector.

19. The figure below shows the capacity available and the likely demand for gas. Based onthe anticipated gas-based capacity additions during the Eleventh Plan, the extent of unmet gasdemand from existing plants, limited gas infrastructure, and increasing gas prices, thedemand-supply gap will persist in India’s power sector. Relative to the projected capacity in theEleventh Plan, however, more fuel is likely to be available. The Plan envisages only 1,890 MWof gas-generating plant, and, considering that an additional 20 MMSCMD is required to meet thedemand of the existing plants, it is expected that the available supply will be able to support anadditional 12,000 MW of capacity. The key factor to determine whether this capacitymaterializes is the price at which this fuel will be available. Given the existing gas-basedcapacity and the anticipated capacity additions under the Eleventh Plan, demand for natural gas

in the power sector is expected to rise to 106.33 MMSCMD by 2007 and further increase to133.66 MMSCMD by 2012.57

57These numbers are arrived at by assuming that 40 percent of all indigenous gas continue to be consumed by thepower sector and power plants are the preferred customers for LNG importers.



96 Appendix 10

3. Gas Transmission

20. The National Gas Pipeline Policy was formulated to promote investment, from bothpublic and private sectors, in natural gas transmission pipelines. The objective of the policy is toensure equitable access to, and equitable distribution of, natural gas by increasing the gassupply, broad-basing the transmission and distribution network, promoting competition, andrecognizing consumers’ interests. While the Pipeline Policy has set out general guidelines,there are many issues about which it is ambiguous and some others have not beenaddressed at all. With respect to some issues the Policy has significant implications, asdiscussed below:

(i) The Policy clearly excludes upstream pipelines forming parts of exploration andproduction projects from the regulator's purview. It brings all other pipelines

within the regulatory framework, including local pipeline networks, but with theexception of captive consumption pipelines.

(ii) It is not clear whether LNG terminals are included or not.(iii) The Policy has not clearly spelled out the role of private sector participants.(iv) By including sales under regulation, the Policy has raised the specter of supply

allocation.(v) Some have contested the choice of a common carrier regime as they say it

requires a high degree of regulation and is more suitable for developed markets.(vi) The details of the tariff determination methodology (i.e., the rate of return

methodology) have not been spelled out.21. The establishment of an independent and stable regulatory body that would havethe power to settle disputes and prevent unfair practices is of prime concern to all

players. Clarity on the scope of regulation, procedures for identifying common carrierpipelines, use of excess capacity, and clear demarcation of the central and stategovernments’ jurisdictions have also been sought. Moreover, players are demanding provisionsto ensure efficient operations and unbundling of GAIL (India) Limited’s (formerly Gas Authorityof India Limited) marketing and transportation businesses.

Demand Supply Gap in Power Sector

106.33

112.12

117.89

124.60

129.97

133.66

55.48

66.41

67.35

88.21

99.51

116.82

FY 2007

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

Total Demand Availability

Figure A10.1: Gas Supply Deficiencies

Source: PricewaterhouseCoopers. 2006.



Appendix 10 97

4. Gas: Conclusions

22. Renewing the emphasis on regional pipelines to provide access to gas andsimultaneously encouraging domestic exploration should be very high priorities. Regulationsaround gas pricing and distribution need urgent attention

D. Nuclear

23. India has only 0.8% of the world’s uranium reserves, most of which are low grade and,when extracted fully, can fuel only 10,000 MW. Moreover, India at present utilizes only 0.1% ofits known uranium compared to world extraction levels of 12–14%. For these reasons, Indiannuclear fuel is 3-4 times costlier than international supplies.

24. India has one of the largest reserves of the nuclear fuel thorium (32% of all knownreserves). Until commercial production of power based on this fuel becomes feasible, however,the nuclear energy program will be uranium based. India has successfully developed a 30-kilowatt-hour prototype thorium-based advance heavy water reactor, and efforts are being madeto apply this technology for commercial power generation.

25. On 18 July 2005 President Bush and Indian Prime Minister Manmohan Singh reached alandmark agreement on civilian nuclear energy cooperation. The deal, which marks a notablewarming of US-India relations, would lift the US moratorium on nuclear trade with India, provideUS assistance to India's civilian nuclear energy program, and expand US-Indian cooperation inenergy and satellite technology. Once the deal is finalized, India would be eligible to buy dual-use nuclear technology, including materials and equipment that could be used to enrich uraniumor reprocess plutonium. Of particular interest in the Indian context is technology that could makeuse of thorium, which is abundantly available in India and does not have the same proliferationand environmental concerns as has uranium technology. An additional benefit for India wouldbe the ability to access the Nuclear Supplier Group and thereby to procure imported fuel for itsreactors.

26. The agreement is not without its share of criticism and political pressures, however. Thenew agreement put restrictions on India’s nuclear research program, and it also would causeIndia to incur huge costs in separating military and civilian nuclear installations. Further, bycommitting to the deal, India would voluntarily commit itself to placing its civilian nuclear facilitiesunder International Atomic Energy Agency safeguards, signing and adhering to an additionalprotocol with respect to civilian nuclear facilities, continuing the unilateral moratorium on nucleartesting, working with the US to help conclude a Fissile Material Cut-Off Treaty, continuing withstringent nonproliferation export controls, and harmonizing with and adhering to the guidelinesof the Missile Technology Control Regime and the Nuclear Supplier Group.

27. The need for producing nuclear power must also be seen against the backdrop of thefact that oil resources are becoming scarce and coal reserves in India are projected to last 80–

140 years. Higher coal, oil, and gas prices would quickly undermine its competitiveness, whilenuclear power generation costs are quite stable over a wide range of fuel price scenarios. It hasbeen established that nuclear power is particularly advantageous in those parts of the country(including the southern and western parts) where hydropower sources are scarce and which arefar away from the coal fields.



MANAGEMENT RESPONSE TO THE SECTOR ASSISTANCE PROGRAM EVALUATIONFOR THE ENERGY SECTOR IN INDIA – BUILDING ON SUCCESS FOR MORE

RESULTS

On 18 October 2007, the Director General, Operations Evaluation Department, received

the following response from the Managing Director General on behalf of Management:

I. General Comments

1. We welcome OED’s Sector Assistance Program Evaluation (SAPE) forthe Energy Sector in India. We find it comprehensive and balanced. The SAPE istimely and will provide valuable input in the preparation of our new CountryPartnership Strategy for India.

2. We note the overall positive assessment of the SAPE: (i) the performanceof ADB assistance to the energy sector in India was successful; (ii) the sector

assistance program was aligned with the development goals outlined in theGovernment’s development plans and was consistent with ADB’s energy policyand country strategies, and (iii) ADB assistance, particularly at the state level,has been highly effective in the areas of energy supply and sector governance.

3. We note that the India energy sector strategy and assistance program for2007–2010 (Energy Sector Program) will (i) continue to support state levelreforms and investments to improve efficiency in the delivery of power; (ii)support national agencies in capacity (generation and transmission) expansion inan environmentally sustainable manner; and (iii) support clean energy andenergy efficiency initiatives at the national and state level. Our assistance willprovide the required long-term financing, introduce best practices, improve sector

and corporate governance, build capacity and ensure sound environmental andsocial safeguard practices.

4. We agree with the SAPE recommendations, which are fully consistentand supportive of the Energy Sector Program.

II. Comments on Specific Recommendations

5. Expand the current focus of operations to balance supply anddemand. We agree with the SAPE suggestion that subject to the Government’sagreement, we continue and expand the current focus on state electricity sectorrestructuring and system expansion to balance supply and demand.

6. We note that the SAPE suggestion is fully consistent with our EnergySector Program in India. Under the Energy Sector Program, we will (i) continueto support state level reforms and investments to improve efficiency in delivery ofpower, and (ii) support national agencies in capacity (generation andtransmission) expansion in an environmentally sustainable manner. Over thenext 3 years, building on our experience in the states of Madhya Pradesh,Assam, Gujarat and Uttaranchal, we plan to expand our assistance to the statesof Bihar, Himachal Pradesh, Jammu and Kashmir.



7. Integrate energy efficiency and renewable energy initiatives intolending programs at both central and state levels. We support this SAPEsuggestion. Under the Energy Sector Program, we plan to support low carbon,clean energy and energy efficiency initiatives at the national and state levels. Ourassistance will cover both demand and supply side management withinterventions, including (i) renovation and modernization of existing powergeneration plants, (ii) replacement of inefficient power plants to enhance energy

efficiency, (iii) renewable and clean energy development, (iv) loss reduction oftransmission and distribution systems, and (v) mainstreaming demand sidemanagement.

8. We also note that our Energy Efficiency Initiative and Carbon MarketInitiatives should be used to facilitate such interventions allowing promotion ofenergy efficiency, renewable energy, and other forms of low carbon energydevelopment utilization.

9. Tailor products and services to meet clients’ evolving needs. Weagree with the SAPE suggestion that we tailor our products and services to meetclients’ needs. We believe this is being done. We are working closely with the

energy sector agencies and states to provide assistance in a timely and relevantmanner by utilizing the full range of lending modalities such as multitranchefinancing facility, public-private partnerships, risk guarantees and other creditenhancement vehicles.

10. Nonsovereign transactions to expand generation and transmission.We support the SAPE suggestion that nonsovereign lending can take on a largerrole to fund the energy sector and to catalyze private sector funds, particularlyinto the transmission and generations. We are discussing with national energysector agencies, including National Thermal Power Corporation, Power GridCorporation of India Limited and Power Finance Corporation about the prospectsfor nonsovereign lending.



1

DEVELOPMENT EFFECTIVENESS COMMITTEE

Chair’s Summary of the Committee Discussions on 24 October 2007 of the:

(i) Country Assistance Program Evaluation for India

(ii) Sector Assistance Program Evaluation for the Transport Sector in India –Focusing on Results

(iii) Sector Assistance Program Evaluation for the Energy Sector in India –Building on Success for More Results

(iv) Special Evaluation Study on ADB Support to Public Resource Management inIndia

Background

1. In introducing the topic, OED stated that this Country Assistance Program Evaluation(CAPE) is the first for India and covers the last 20 years (1986 to 2006), although most of theanalysis focused on the last ten years. The main purpose of the study was to provide input tothe preparation of Country Partnership Strategy (CPS) for India. India is both a majorshareholder and a borrowing member country with substantial influence on ADB’s portfolio.ADB’s assistance to India in the last 20 years has been about $17 billion in public sectorlending, $147 million in TA assistance, and $756 million in ADB’s private sector operations.There are three other Sector Assistance Program Evaluation (SAPE) reports supporting thisCAPE: one each on transport sector, energy, and public resource management. This CAPEtakes into account the findings and recommendations of these three studies. Conforming to therequirements of DEC, this CAPE has also incorporated the views of the Government of India on

its partnership with ADB. Management agrees with the CAPE’s overall rating of “successful”,and concurs with the overall conclusions and key recommendations.

Project processing consumes more staff resources than project administration

2. To a query by a DEC member, OED confirmed that in the case of India, projectprocessing consumes more staff resources than project administration in terms of missiontravel. Director General (DG) of the South Asia Department (SARD), indicated that moreresources for portfolio management have been allocated in recent years with improvedperformance.

Quality of assistance program has improved over time

3. One DEC member noted the report’s finding that the quality of the assistance programduring the latter 10 years of the evaluation period has improved in comparison to the earlier 10year period. He added that the report observes that ADB has and could continue to scale up itsassistance to India in the coming years.



2

Assistance to Rural Development

4. Observing that there was a recent focus by ADB in rural development in India, one DECmember asked how this would fit into the core of the evolving Long-Term Strategic Framework(LTSF) plan of ADB. He pointed out that the agriculture sector, perhaps with the exception of

irrigation infrastructure, was not playing a dominant role in the evolving LTSF. Another DECmember observed that rural and agricultural developments are important to India, and to China,and asked how ordinary capital resources (OCR) funding could be provided to these sectors ina viable way. Another member, observing that while the agriculture sector is important forpoverty alleviation and while core priorities under Medium Term Strategy (MTS II) of ADB havealready been chosen, asked OED to elaborate their views on this issue. OED responded thatMTS II does include irrigation infrastructure as a priority 1 sector. OED added that evaluationresults show that agriculture is a challenging sector and if ADB were to continue to be involvedin this sector, then it should know how to manage the risks. In addition, quite often, the solutionto poverty does not lie in the rural areas, but elsewhere where jobs are being created and thuscausing migration. OED further noted that if ADB were to get involved in a sector, it should bethere for a long term and there should be strong country commitment. DG, SARD responded

that ADB is supporting India’s rural development program to make the growth process moreinclusive. In 2006, it provided a $1 billion program loan for strengthening rural cooperatives andimproving availability of credit in rural areas. Further, ADB will be providing assistance forstrengthening agribusiness and irrigation infrastructure, and improving water resourcesmanagement in selected states over the 2008-2010 period.

Safeguard Policies

5. One DEC member noted that the report observes that ADB’s safeguard policies havecreated the perverse effect of the client deliberately avoiding ADB projects that have sensitiveenvironmental or re-settlement issues. He further added that the report appeals to India tobecome more open to dialogue with ADB and the Resident Mission (RM), and to update the

Indian safeguard policies. Another DEC member noted that report was pointing out that ADB’ssafeguard policies were adding to the transaction costs of borrowing from ADB, and stated thatif a country is trying to develop its own safeguard policies, how can ADB insist on its ownsystem and not use the country’s system of safeguards. Is ADB going to continue to insist onusing its own safeguard policies or move towards using the country system, he asked. OneDEC member asked OED to clarify what it means by its statement in the report, “in the meantime ADB should harmonize its approach to common safeguard concerns in India.” OEDresponded that three major evaluations completed by early this year had fed into the ongoingsafeguard review. The safeguard systems in some countries are strong, while in others they areweak. In China, and in some states of India, these systems are strong. In other countries, it willbe a very long time before ADB can use these countries’ systems. OED would recommendstrengthening these systems progressively in a move towards using them. While many DMCs

would encourage ADB using their safeguard system, many NGOs would oppose such a move.DG, SARD added that while this is an ADB-wide issue, SARD is making all efforts to find waysof harmonizing among systems of donors and aligning with the safeguard systems of theinstitutions whose projects ADB is supporting.

Resident Mission

6. Noting that the report appeals to strengthen the India Resident Mission (INRM) andobserving that ADB’s largest private sector operation is in India, a DEC member asked if OED



3

had a specific recommendation to strengthen the private sector activities by the RM. AnotherDEC member stated that for a country like India with a large pool of highly qualified economistsand management specialists, there is no reason why the RM could not be strengthened withmore and qualified staff. That would help to improve the dialogue with the Central and Stategovernments. Another member pointed out that without delegation of appropriate level ofauthority to the RM, it would not be able to function effectively. Yet another DEC member said

that as the Management had noted in its response, it is a bank-wide issue and consequentlyshould be addressed in that context and not in isolation. Another DEC member noted that thegovernment has specifically emphasized the need for further decentralization to the INRM withadequate staffing and use of country systems, and changes in business processes forstreamlining ADB’s operation in India. He added that decisions on these issues should befinalized before the CPS is finalized. OED responded that it has consistently advocatedstrengthening of resident missions and Management has insisted that it is an ADB-wide issue.OED has found from its studies that when the resident missions are strengthened, the client, itsexecuting agencies, and NGOs all get better service. He added that this strategy would requiredeveloping an accountability framework, delegating more authority, and allocating more staff. Itwould necessitate in ADB changing its business model. This would have major implication forADB, and thus he cautioned that this should be preceded by a major feasibility study. DG,

SARD, while acknowledging that this is an ADB-wide issue, said that in the case of India, theycould not wait for the outcome of ADB-wide review of RM policy. He added that SARD hasfound ways to provide additional support to INRM by delegating more responsibilities byrequesting Private Sector Operations Department and the Office of General Counsel to redeploya professional staff position each to the INRM. The large operation in India makes it possible to

justify one of each of these specialized staff to be redeployed. In addition, one position from oneof the divisions in SARD also has been reassigned to INRM. Further, the number of NationalOfficers positions has been increased from 11 to 19.

Number and quality of ADB staff for India operation

7. A DEC member, noting that the report points out the need for strengthening the quality

and number of staff involved in the India operation, said that both the donor and borrowingcountries should form an alliance to push ADB for necessary reform steps. Noting that thereport points out that ADB had not fully exploited its potential to assist India, another DECmember asked OED to elaborate more on why this was the case. He asked OED if one of thereasons why perhaps ADB could not give timely support to India was because of lack ofadequately qualified experts in ADB. He wanted to know if there were other reasons for not fullyexploiting ADB’s potential in India. Another DEC member, pointing out that the report makes itclear that there is a need for specialized expertise in economic and sector work to develop newfunding methodology for public-private partnership etc., asked if ADB would be able to deliver inthis respect. He further asked how long it would take ADB to deliver if it is not already in a readystate to deliver such services. Another DEC member noted that the government expects ADB’soperations in India to expand to $4 billion per year and asked if ADB would be able to allocate

the necessary staff, technical assistance (TA) funds and other resources to rise up toexpectation. DG, SARD responded that it is crucial to help the Government improve thecapacity to promote public-private partnership (PPP), and so, ADB has provided large scaletechnical assistance to set up PPP cells in 14 states. These cells are in charge of identifyingand carrying out preliminary assessment of PPP projects. ADB’s support to PPP is expected tobe scaled up.



4

Coordination between Public and Private Sector Operations of ADB

8. Noting the report’s observation that there is potential for improving the coordinationbetween ADB’s public and private sector operations, and pointing out that there is an ADBproposal to merge the private sector operations within the public sector operations, a DEC

member asked what OED thought of the plan. Another DEC member pointed out that the reportstates that there should be synergy between ADB’s public and private sector operations, andasked what ADB is doing about it. Another DEC member, while agreeing with this view,observed that the coordination between ADB’s public and private sector operations hassignificantly improved over the last couple of years. OED responded that it had done anevaluation report on this issue which was discussed by DEC in June. That study proposed twoor three modes for consideration. Responding to the specific question about merging PSODwith Public Sector Departments, DG, OED said that the implications for such a change wouldhave to be considered. He noted that since staff in the public sector are used to designingprojects that are backed by government guarantee, they may not be able to fully appreciate therisks associated with private sector lending. DG, SARD responded that SARD is activelypursuing projects in which both the public and private sector work together to achieve project

goals and to bring synergy on development impact through their partnership.

Access to Asian Development Fund (ADF)

9. Pointing out that the report has classified ADB’s assistance program to be successful,but on the low side, one DEC member asked if the low side rating may have been the result ofIndia’s lack of access to ADF. If India had access to ADF, it could have helped India to eradicatepoverty a little more. He asked what OED thought of this lack of access of ADF to India. Hefurther noted that there are limits on ADB’s assistance to any country and that for majorcountries like India, and China, ADB’s assistance may be even less than one percent of theamount needed for development, and asked if ADB could have provided more assistance thenthat would have made a difference.

More field office resources for improving project implementation

10. A DEC member commended OED for recommending that more field office resourcesshould be added to improve project implementation. He added that ADB should also providemore support for executing agencies (EA) and other local entities in charge of projectimplementation.

Knowledge Services

11. Observing that demand for knowledge services from middle-income countries like Indiaand China are likely to increase, a DEC member asked if ADB is ready to meet such demands.

OED responded that clearly knowledge management is an area where ADB could do more buthas not been able to. ADB is not as successful as it would like to be. The main reason is theskills of the staff. ADB tries to outsource through TAs and consultants; these efforts aresometimes successful and at other times not so.

Regional Cooperation

12. Noting that India has been active in promoting South Asia Regional Cooperation, a DECmember asked why the report did not deal extensively with the issue and/or its recommendation



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for ADB’s assistance to India to participate in regional projects to integrate with the regionaleconomies. OED responded that there has not been much investment projects in the region.There has been much policy dialogue that ADB supported. Now there are a few projects, butthey are not completed yet. It would be a good topic for the next CAPE to cover. DG, SARDadded that the first investment project in regional cooperation is soon coming to the Board for itsconsideration. It is a project in information communication technology. It is small, but there is an

understanding among the four countries about the benefit to be mutually shared.

World Bank versus ADB

13. A DEC member asked OED what they thought of the relative performance of the WorldBank (WB) vis-à-vis ADB in providing assistance to their members. OED responded that WBhas three times as many staff in their resident mission in India as ADB has in its residentmission in India. ADB resident mission staff is under stress. The portfolio of WB in India issimilar to that of ADB. Consequently, with a larger staff, WB can generally do things better thanADB. They do better in knowledge management, macro-economics etc. They certainly do betteron safeguard policies. It is a difficult comparison, but in terms of resources, WB has much largerresources than ADB in every country across the region. An OED staff added that in general,

ADB fares better in project management and does poorly in knowledge services and policydialogue and that perhaps reflect the quality of ADB’s staff resources and its reliance on TAsand consultants.

Financial Sector Operations

14. Noting that there were many cancellations in financial sector operation due to lack ofdemand and other problems, a DEC member asked why this happened and what could be doneto prevent such a thing from happening in the future. OED responded that due to unaddressedstructural impediments, there were not enough private sector infrastructure projects that wouldhave met the criteria set by ADB for its credit lines that supported infrastructure projects. In thehousing market, there were enough alternative financing resources available locally at better

rates. Initially, ADB’s line of credit looked competitive in terms of pricing. But as domesticinterest rate, exchange rate, and guarantee fees of the government changed ADB fundsbecame unattractive. INRM staff added that one of the reasons for the low demand for theloans was that ADB was imposing its safeguards, particularly those relating to re-settlement, onthe sub-borrowers. As these would affect profitability, the private sector borrowers werereluctant to accept these conditions and borrow. Another reason was that there was surplus ofliquidity in the economy, and the interest rates were not favorable.

Viability of Transport Sector Projects

15. Recollecting that DG, OED had earlier stated in a previous DEC meeting that internalrate of return (IRR) calculations of transport sector projects are based on overly optimistic

assumptions, and that these projects on average are delayed by a year and a half, thusrendering these IRR calculations meaningless, DEC member asked when ADB was going tolearn the appropriate lessons and take action to address these issues.

Anchor Expansion and Lending Volume

16. The report’s recommendation 1(iii) asks ADB to “anchor expansion in lending volumesand the addition of new sectors and states to a country strategy business plan which ensures



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that aspirations are matched by adequate resources”. A DEC member noted that theManagement has sidestepped the issue of developing a business plan as part of CPS.

Economic and Thematic Sector Work

17. A DEC member noted that the economic and thematic sector work as a component of

work program should be agreed with the Government of India as part of CPS rather than beingdecided on an ad-hoc basis. He invited DEC to take a position on this issue. He further pointedout that Management appears to be sidestepping the related recommendation on this issue byOED.

Headroom for Private Sector Lending

18. Noting the Management view that use of currency swaps will increase headroom forprivate sector lending, one DEC member asked how the currency swaps would increase theheadroom. INRM staff responded that exchange risk is often too much for a private sectorborrower to bear and currency swap is one of the mechanism ADB has by which it eliminatesthe foreign exchange risk for the borrower.

Procurement from Non-member countries

19. Noting that the Government of India has specifically suggested relaxing procurementrestriction from non-member countries for the PPP projects as the Government of India systemis based entirely on competition, one DEC member asked SARD and COSO to respond to thissuggestion. Country Director, India, stated that the first stage of implementation of a PPPproject is to select a partner to undertake the PPP. Under the model concession agreement, thepartner will have to establish a company under the Indian Companies Act. Thus, the nationalityof the company that will do the project will be Indian. Consequently, there is a differencebetween the traditional way of procuring civil works and supplies. The Government of India isrequesting ADB to reconsider the way it applies the procurement guidelines. Principal Director,

COSO, responded that procurement from non-member country is a restriction imposed by theADB Charter. He added that COSO is looking at this issue in a creative way. It is an importantissue, particularly given the magnitude of the investment needs. He agreed with the analysis ofCountry Director, INRM and added that this is a financial engineering in a grand way and that itis not a procurement of civil works for a simple project. He further added that COSO isconsulting with ADB’s legal department and he was optimistic about a good outcome.

Is ADB Operating in too many states for it to be effective?

20. While acknowledging that it is important to be present in states where there is poverty, amember asked if ADB is involved in too many states for its operation to be effective. Is the spanof control optimal? Country Director, INRM responded that until 2003, ADB operation was

focused on selective states. In most cases, these states were considered to be reform minded.As a consequence of ADB’s success in these states, several of them are performing better. Hecited several examples to support his argument. This has allowed ADB to expand itsgeographical coverage, which is also the wish of the government.



Conclusions

21. DEC Chair drew the following conclusions from the discussion:

(i) DEC noted the rating of successful on the low side. Some members emphasized

that the report should give prominence to the recent period within the 20 yearperiod the evaluation covered.

(ii) For better performance, what is important is knowledge, quantity and quality ofresources.

(iii) DEC endorsed the policy of infrastructure led poverty reduction, but wantedManagement to carefully analyze the consistency between LTSF and MTSII onthe one hand, and emphasis on rural development and agriculture on the other.

(iv) Safeguards are important, but there is need to harmonize safeguard standards.

(v) Some members also encouraged the authorities to consider environmentallychallenging projects.

(vi) The problem of coordination between ADB’s public and private sector operationswas emphasized, so was capacity development.

(vii) The need for accelerating regional cooperation in South Asia was emphasized.

(viii) The question of strengthening the Resident Mission as well as providingadequate financial resources was necessary to be resolved before drawing upthe forthcoming country partnership strategy.

ASHOK K. LAHIRI

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